SEBI’s Comprehensive Guidelines on Gold Exchange Trading

The Securities and Exchange Board of India (SEBI) has issued a master circular consolidating all guidelines related to trading gold on the Gold Exchange, also known as electronic gold receipts (EGRs). This comprehensive document includes rules on risk management and procedures for vault managers and depositories, providing stakeholders with a single reference point for all provisions.

EGR Trading Process: A Three-Stage Approach

Creation of EGRs

The EGR trading process begins when physical gold is deposited into accredited vaults. The gold must meet specific standards, and this stage is managed through a common interface accessible to vault managers, depositories, stock exchanges, and clearing corporations. Once the gold is verified and accepted, EGRs are created and recorded in the owner’s demat account, making them tradable on stock exchanges. Regular reconciliation between EGR data and physical gold ensures accuracy.

Continuous Trading of EGRs 

EGRs are actively traded on stock exchanges, with information about their creation periodically shared between depositories, stock exchanges, and clearing corporations. Trade settlements involve transferring EGRs and cash between buyers and sellers.

Conversion Back to Physical Gold

Owners can convert EGRs back into physical gold by requesting conversion through depositories. The depositories coordinate with vault managers for gold delivery. Upon withdrawal of the physical gold, the corresponding EGRs are extinguished, and records are updated accordingly.

Price Band Mechanism for EGR Trading

Stock exchanges will enforce a price band mechanism to prevent orders from exceeding set price limits. Initially, the price limit is set at 10% of the previous closing price. In the event of significant market trends, these limits can be adjusted in 5% increments. Stock exchanges will consider international market movements when adjusting these bands and can make immediate changes during extreme price fluctuations with proper notice.

Mandatory Unique Client Code (UCC) for EGR Transactions

For all transactions in the EGR segment, having a unique client code is mandatory. Members are required to upload UCC details for all clients before executing trades, ensuring traceability and compliance.

Financial Security Deposit for Vault Managers

Vault managers must provide a financial security deposit (FSD) of Rs 10 lakh to one of the depositories before obtaining SEBI registration. The FSD can be in cash, bank deposits, or guarantees and serves to compensate clients for losses caused by the vault manager. If the FSD is utilized, it must be replenished within seven days.

Compliance and Security Requirements for Vault Managers

Vault managers must appoint a compliance officer responsible for ensuring adherence to relevant regulations. The compliance officer must issue quarterly compliance declarations. Additionally, vaults must be secure, with strong rooms, proper connections, and clear demarcations for EGR business.

These guidelines aim to streamline the trading of gold on the Gold Exchange, ensuring a secure and efficient process for all stakeholders involved.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.