Daily margins payable by the trading members in the Cash market consists of the following:
(i) Value at Risk (VaR) margin
(ii) Mark to Market Margin
(iii) Extreme Loss Margin
The margins are computed at client level. A member entering an order, needs to enter the client code. Based on this information, margin is computed at the client level, which will be payable by the trading members on upfront basis. Let us see in details what is meant by these margins.
Value at Risk Margin: VaR is a single number, which encapsulates whole information about the risk in a portfolio. It measures potential loss from an unlikely adverse event in a normal market environment. It involves using historical data on market prices and rates, the current portfolio positions, and models (e.g., option models, bond models) for pricing those positions. These inputs are then combined in different ways, depending on the method, to derive an estimate of a particular percentile of the loss distribution, typically the 99th percentile loss.
Computation of VaR Margin: VaR Margin is a margin intended to cover the largest loss that can be encountered on 99% of the days (99% Value at Risk). For liquid securities, the margin covers one-day losses while for illiquid securities; it covers three-day losses so as to allow the clearing corporation to liquidate the position over three days. This leads to a scaling factor of square root of three for illiquid securities. For liquid securities, the VaR margins are based only on the volatility of the security while for other securities, the volatility of the market index is also used in the computation:
Some Definitions: Computation of the VaR margin requires the following definitions:
a) Security sigma: It means the volatility of the security computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.
b) Security VaR: It means the higher of 7.5% or 3.5 security sigmas.
c) Index sigma: It means the daily volatility of the market index (CNX Nifty or BSE Sensex) computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.
d) Index VaR: It means the higher of 5% or 3 index sigmas. The higher of the Sensex VaR or Nifty VaR would be used for this purpose.
Collection of VaR Margin: 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 is collected on the gross open position of the member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including its proprietary position. For this purpose, there would be no netting of positions across different settlements.
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 net outstanding position in any security is nil, the difference between the buy and sell values 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 means the gross of all net positions across all the clients of a member including its proprietary position.
Trade Segment (TFT segment) each trade is marked to market based on the closing price of that security. The MTM margin so collected is released on completion of pay-in of the settlement.
EXTREME LOSS MARGIN
The Extreme Loss Margin for any security is higher of:
a) 5%, or
b) 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.
