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Risk Management

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NSE Trading System - Risk Management (Equities)

With the objective that a sound risk management system is integral to an efficient clearing and settlement system, NSE introduced for the first time in India, risk containment measures that were common internationally but were absent from the Indian securities markets.

NSCCL has put in place a comprehensive risk management system, which is constantly upgraded to pre-empt market failures. The Clearing Corporation ensures that trading member obligations are commensurate with their networth.

Risk containment measures include capital adequacy requirements of members, monitoring of member performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached, etc.

Risk Management - Equities Segment - Margins

Margin stipulation at NSE is based on the categorisation of stocks. Stocks are graded into three categories (Category I, II & III) based on the past statistics of their turnover at the exchange. Daily margin payable by members consist of the following:

  1. Value at Risk Margin

  2. Mark to Market Margin

Daily margin, comprising of the sum of VaR margin and mark to market margin is payable.

Value at Risk Margin

VaR margin is applicable for all securities in rolling settlement. All securities are classified into three groups for the purpose of VaR margin.

  • For the securities listed in Group I Scrip wise daily volatility calculated using the exponentially weighted moving average methodology that is used in the index futures market and the scrip wise daily VaR would be 3.5 times the volatility so calculated.

  • For the securities listed in Group II the VaR margin shall be higher of scrip VaR (3.5 sigma) or three times the index VaR, and it shall be scaled up by root 3.

  • For the securities listed in Group III , the VaR margin would be equal to five times the index VaR and scaled up by root 3.

VaR margin rate for a security constitutes the following:

  1. Value at Risk (VaR) based margin, which is arrived at, based on the methods stated above. The index VaR, for the purpose, would be the higher of the daily Index VaR based on S&P CNX NIFTY or BSE SENSEX. The index VaR would be subject to a minimum of 5%.

  2. Additional VAR Margin : 6% as specified by SEBI.

  3. Security specific Margin : NSCCL may stipulate security specific margins for the securities from time to time.

The VaR based margin would be rounded off to the next higher integer (For Eg: if the VaR based Margin rate is 10.01, it would be rounded off to 11.00) and capped at 100%.

The VaR margin rate computed as mentioned above will be charged on the net outstanding position (buy value-sell value) of the respective clients on the respective securities across all open settlements. The net position at a client level for a member are arrived at and thereafter, it is grossed across all the clients for a member to compute gross exposure for margin calculation.

For example, in case of a member, if client A has a buy position of 1000 in a security and client B has a sell position of 1000 in the same security, the net position of the member in the security would be taken as 2000. The buy position of client A and sell position of client B in the same security would not be netted. It would be summed up to arrive at the memberís exposure for the purpose of margin calculation.

Mark-to-Market Margin

Mark to market margin is computed on the basis of mark to market loss of a member. Mark to market loss is the notional loss which the member would incur in case the cumulative net outstanding position of the member in all securities, at the end of the relevant day were closed out at the closing price of the securities as announced at the end of the day by the NSE. Mark to market margin is calculated by marking each transaction in a scrip to the closing price of the scrip at the end of trading. In case the security has not been traded on a particular day, the latest available closing price at the NSE is considered as the closing price.

In the event of the net outstanding position of a member in any security being nil, the difference between the buy and sell values would be considered as notional loss for the purpose of calculating the mark to market margin payable

MTM profit/loss across different securities within the same settlement is set off to determine the MTM loss for a settlement. Such MTM losses for settlements are computed at client level.

Margin Payment & Payout

Payment of margin

The daily margin for rolling settlements is payable on T+1 day. The margin is collected together for all settlements for all clients. Members are responsible to compute margin payable and to make suitable margin payments on the due date. Members are required to deposit the margin money due in cash, bank guarantee or FDRs, rounded off to the next higher multiple of Rs.10,000/-.

Payout of margin

The margins deposited in cash on a given day may, if NSCCL chooses not to exercise its lien, be returned to the member on the subsequent day after adjustment for margin, additional base capital and any other funds dues. NSCCL may, at its discretion may retain part or whole of the amount releasable cash margin, with respect to any member as a risk containment measure.

Upfront margins collection

Members are required to ensure collection of upfront margin from their clients at rates mentioned below and deposit the same in a separate clients account, in respect of trades in Normal market which would result in a margin of Rs.50,000/- or more, after applying the margin percentages as given below:

Groups
(Securities Covered
Upfront
Margin Rate
Group I 15%
Group II 30%
Group III 45%

Failure to pay margin

Non-payment of either the whole or part of the margin amount due will be treated as a violation of the Bye Laws of the Clearing Corporation and will attract penal charges @ 0.09% per day of the amount not paid throughout the period of non-payment.

In case a member has a margin shortage of Rs. 10 lacs or above for more than 10 occasions in the past 4 weeks, the gross exposure multiple of the member will be reduced to one level lower at the time of re-activation of their trading terminals as given under:

Slab Multiple
Full Exposure 8.50 times
1st Level 7.00 times
2nd Level 5.00 times
3rd Level 3.00 times
4th Level 2.00 times

If there is no margin shortage for the next 1 week of Rs. 10 lacs or more, the exposure limits shall be restored to the previous levels.

If there is a margin shortage for more than Rs.5 lakhs, the trading facility of the member will be withdrawn immediately. However, in case of a shortage of less than Rs. 5 lakhs, the trading facility of the member will be withdrawn only if the member has a shortage for 3 times or more in last 6 instances of margin payment.

In addition, NSCCL may, within such time as it may deem fit, advise the Exchange to withdraw any or all of the membership rights of the member including the withdrawal of trading facilities without any notice.

In the event of withdrawal of trading facilities, the outstanding positions of the member may be closed out, to the extent possible, forthwith or any time thereafter by NSCCL, at its discretion by placing at the Exchange, counter orders in respect of the outstanding position of the member, without any notice to the member, and such action shall be final and binding on the member.

Margins based on turnover & Exposure limits (Initial margins)

Intra-day turnover limit

Members are subject to intra-day trading limits. Gross turnover (buy+sell) intra-day of the member should not exceed twenty five (25) times the base capital (cash deposit and other deposits in the form of securities or bank guarantees with NSCCL and NSE).

Members violating the intra-day gross turnover limit at any time on any trading day are not be permitted to trade forthwith.

Members's trading facility is restored from the next trading day with a reduced intra-day turnover limit of 20 times the base capital till deposits in the form of additional deposits (additional base capital) is deposited with NSCCL.

Members are given a maximum of 15 days time from the date of the violation to bring in the additional capital. Upon members failing to deposit the additional capital within the stipulated time, the reduced turnover limit of 20 times the base capital would be applicable for a period of one month from the last date for providing the margin deposits.

Upon the member violating the reduced intra-day turnover limit, the above mentioned provisions apply and the intra-day turnover limit will be further reduced to 15 times. Upon subsequent violations, the intra-day turnover limit will be further reduced from 15 times to 10 times and then from 10 times to 5 times the base capital. Members are not permitted to trade if any subsequent violation occurs till the required additional deposit is brought in.


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[ last updated on 15.10.2004 ]<>[ chkd-apvd-ef ]