Scribd
Upload
90 views

Risk Management: Value at Risk Margin

NSCCL has implemented a comprehensive risk management system for the Indian securities markets that includes capital adequacy requirements, stringent margin requirements, position limits, online monitoring of member positions, and automatic trading disables. Margins including Value at Risk margin, Extreme Loss margin, and Mark to Market margin are calculated daily based on security volatility and position size. Margins are collected upfront and released upon settlement to control risk and ensure obligations are met.

Uploaded by

rachealll
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
90 views

Risk Management: Value at Risk Margin

NSCCL has implemented a comprehensive risk management system for the Indian securities markets that includes capital adequacy requirements, stringent margin requirements, position limits, online monitoring of member positions, and automatic trading disables. Margins including Value at Risk margin, Extreme Loss margin, and Mark to Market margin are calculated daily based on security volatility and position size. Margins are collected upfront and released upon settlement to control risk and ensure obligations are met.

Uploaded by

rachealll
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Risk Management

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.

Margins
Daily margin, comprising of the sum of VaR margin, Extreme Loss Margin and mark to market margin is payable. Daily margins payable by members consists of the following:
Value at Risk Margin
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 is applied to daily returns. The scrip wise daily VaR is 3.5 times the volatility so calculated subject to a minimum of 7.5%. For the securities listed in Group II, the VaR margin is higher of scrip VaR (3.5 sigma) or three times the index VaR, and it is scaled up by root 3. For the securities listed in Group III the VaR margin is equal to five times the index VaR and scaled up by root 3. The index VaR, for the purpose, is the higher of the daily Index VaR based on CNX NIFTY or BSE SENSEX, subject to a minimum of 5%. NSCCL may stipulate security specific margins from time to time. The VaR margin rate computed as mentioned above is charged on the net outstanding position (buy value-sell value) of the respective clients on the respective securities across all open settlements. There is no netting off of positions across different settlements. The net position at a client level for a member is arrived at and thereafter, it is grossed across all the clients including proprietary position to arrive at the gross open position. 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 is taken as

2000. The buy position of client A and sell position of client B in the same security is not netted. It is summed up to arrive at the members open position for the purpose of margin calculation. The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade. The VaR margin so collected is released on completion of pay-in of the settlement or on individual completion of full obligations of funds and securities by the respective member/custodians after crystallization of the final obligations on T+1 day.

Extreme Loss Margin


The Extreme Loss Margin for any security is higher of: 5%, or 1.5 times the standard deviation of daily logarithmic returns of the security price in the last six months. This computation is done at the end of each month by taking the price data on a rolling basis for the past six months and the resulting value is applicable for the next month. Download Extreme Loss Margin (.csv) The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the member on a real time basis. The Extreme Loss Margin is collected on the gross open position of the member. The gross open position for this purpose means the gross of all net positions across all the clients of a member including its proprietary position. There is no netting off of positions across different settlements. The Extreme Loss Margin collected is released on completion of pay-in of the settlement or on individual completion of full obligations of funds and securities by the respective member/custodians after crystallization of the final obligations on T+1 day.

Mark-to-Market Margin
Mark to market loss is calculated by marking each transaction in security to the closing price of the security at the end of trading. In case the security has not been traded on a particular day, the latest available closing price at NSE is considered as the closing price. In case the net outstanding position in any security is nil, the difference between the buy and sell values shall be is considered as notional loss for the purpose of calculating the mark to market margin payable. The mark to market margin (MTM) is collected from the member before the start of the trading of the next day. The MTM margin is collected/adjusted from/against the cash/cash equivalent component of the liquid net worth deposited with the Exchange. The MTM margin is collected on the gross open position of the member. The gross open position for this purpose means the gross of all net positions across all the clients of a member including its proprietary position. For this purpose, the position of a client is netted across its various securities and the positions of all the clients of a member are grossed. There is no netting off of the positions and setoff against MTM profits across two rolling settlements i.e. T day and T+1 day. However, for computation of MTM profits/losses for the day, netting or setoff against MTM profits is permitted.

Margins for Corporate bonds Bonds with credit rating of AAA, AA, or A shall be levied a fixed margin of 10% and Bonds which do not have the said credit rating shall be levied margins in accordance with the specifications in circular no. NSCC/CM/C&S/337 dated May 09, 2005.

Download Circular NSE/CMPT/6122 (.htm) Trade for Trade segment Surveillance segment In case of securities in Trade for Trade Surveillance segment (TFT-S segment) the upfront margin rates (VaR Margin + Extreme Loss Margin) applicable is 100 % and each trade is marked to market based on the closing price of that security. Capping of margins In case of a buy transaction, the VaR margins, Extreme loss margins and mark to market losses together cannot exceed the purchase value of the transaction. In case of a sale transaction, the VaR margins and Extreme loss margins together are capped to the extent of the sale value of the transaction and mark to market losses are also levied. The details of all margins VAR, extreme loss margin and mark to market as at end of each day are downloaded to members in their respective Extranet directory. Download all Margins (.pdf) Release of margins All margins collected for a settlement for a member/custodian are released on their individual completion of full obligations of funds and securities by the respective member/custodians after crystallization of the final obligations on T+1 day. Further, members are provided a facility to provide confirmation from their clearing banks towards their funds pay-in obligations on settlement day before prescribed pay-in time through the prescribed procedure. Margins collection from Client Members should have a prudent system of risk management to protect themselves from client default. Margins are likely to be an important element of such a system. The same should be well documented and be made accessible to the clients and the Stock Exchanges. However, the quantum of these margins and the form and mode of collection are left to the discretion of the members.
http://www.nseindia.com/supra_global/content/nsccl/risk_mgt.htm

You might also like