ICCL - Equity Margin
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Margin
1 Margining Process

The core of the risk management system followed in Equity Cash Segment is based on the Liquid Assets deposited by members with the Clearing Corporation and is, inter alia, intended to cover mainly the requirements of:

  • VaR Margin (Initial Margin)
  • Extreme Loss Margin (ELM)
  • Mark to Market (MTM)
The liquid assets deposited by members at all points of time should be adequate to cover the aforesaid requirements.

2 Initial Margin

a) Volatility

The standard deviation (volatility estimate) is computed using the Exponentially Weighted Moving Average method ("EWMA"). The estimate at the end of time period t (σt) is estimated using the volatility estimate at the end of the previous time period. i.e. as at the end of t-1 time period (σt-1), and the return (rt) observed in the spot market during the time period t. The volatility estimated at the end of the day's trading is used in calculating the initial margin calls at the end of the same day.

The formula is as under:

Volatility


Where:
  • λ is a parameter which determines how rapidly volatility estimates changes. The value of λ is currently fixed at 0.995.
  • σ (sigma) means the standard deviation of daily returns in the futures market.
  • r (return) is defined as the logarithmic return: rt = ln (St/St-1) where St is the price of the Stock at time t.

b) Liquidity Categorization of Securities

The securities traded in the Equity Cash Segment are categorized into three groups viz, Group I, Group II and Group III based on their trading frequency and impact costs as detailed below:

Group Trading Frequency Impact cost
Liquidity Securities (Group I) At least 80% of the days Less than or equal to 1%
Liquidity Securities (Group II) At least 80% of the days More than 1%
Illiquidity Securities (Group II) Less than 80% of the days Not Applicable


The Categorization of securities is carried out monthly by calculating the trading frequency and impact cost on the 15th of each month on a rolling basis considering the previous six months for impact cost and previous six months for trading frequency.

On the basis of the trading frequency and impact cost so calculated, the securities are moved from one group to another group from the 1st of the next month.

For the first month and till the time of monthly review, a newly listed stock is categorized in that Group where the market capitalization of the newly listed stock exceeds or equals the market capitalization of 80% of the stocks in that particular group.

Subsequently, after one month, whenever the next monthly review is carried out, the actual trading frequency and impact cost of the security is computed, to determine the liquidity categorization of the security.

For securities that have been listed for less than six months, the trading frequency and the impact cost is computed using the entire trading history of the scrip.

c) Mean Impact Cost

Liquidity in the context of stock markets means a market where large orders can be executed without incurring a high transaction cost. The transaction cost referred here is not the fixed costs typically incurred like brokerage, transaction charges, depository charges etc. but is the cost attributable to lack of market liquidity.

Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined order size, at any given point of time.

Impact cost is calculated by taking four snapshots in a day from the order book in the past six months. These four snapshots are randomly chosen from within four fixed ten-minutes windows spread through the day.

The impact cost is the percentage price movement caused by an order size of Rs.1 Lakh from the average of the best bid and offer price in the order book snapshot.

The impact cost is calculated for both, the buy and the sell side in each order book snapshot.

d) Value at Risk (VaR) Margin

The VaR Margin is a margin intended to cover the largest loss that can be encountered on 99% of the days i.e. 99% Value at Risk.

The Value at Risk ("VaR") margin rates are as follows:

Product VaR Margin Rates
Group1 Based on 6σ, subject to a minimum of 9%
Group 2 Based on 6σ, subject to a minimum of 21.5%
Group 3 50% if traded at least once per week on any stock exchange; 75% otherwise

In case of Exchange Traded Funds ("ETFs") that track broad based market indices and do not include indices which track sectoral indices, the VaR margin rate shall be 6σ, subject to a minimum of 6%.

In case of Group 3 the securities shall be monitored on a weekly basis, and the VaR - margin rates shall be increased to 75% if the security has not traded for a week. In case the VaR margin rate is 75% and the security is traded during the day, the VaR margin rate shall be revised to 50% from start of next trading day.

3 Extreme Loss Margin (ELM)

Extreme Loss Margin (ELM) covers the expected loss in situation that go beyond those envisaged in the 99% Value at Risk estimates used in the VaR Margin.

Extreme Loss Margin
Stocks 3.5%
Broad based ETF* 2%

*ETFs that track broad based market indices and do not include ETFs which track sectoral indices.

4 Current Exposure Margin

a) Intraday Current Exposure Margin

The margining system of Clearing Corporations currently levies margin based on net value (Buy –Sales value) of unsettled trades in the cash segment.

Intraday Crystallised Loss Margin is levied to cover the risk arising out of accumulation of crystallised obligations incurred on account of intra-day squaring off of position. The intra-day crystallised losses are monitored and blocked by Clearing Corporations from the free collateral on a real-time basis only for those transactions which are subject to upfront margining.

Crystallised losses are offset against crystallised profits at a client level, if any. If crystallised losses exceed the free collateral available with the Clearing Corporation, then the entity shall be put into risk reduction mode. Crystallised losses are calculated based on weighted average prices of trades executed. Adjustment of intraday crystallised losses is not done from the exposure free liquid networth of the clearing member.

b) Mark to Market Losses ("MTM")

Mark to Market Losses is collected in the following manner:

  • Clearing Corporations collect the mark to market margin ("MTM") from the Clearing Member before the start of the trading of the next day.
  • The MTM margin is collected from the Clearing Member first by adjusting the same from the available cash and cash equivalent component of the liquid assets and the balance MTM in form of cash from the Clearing Member through their Clearing Banks before the start of the trading of the next day.
  • The MTM margin is collected on the gross open position of the clearing member.
  • There is no netting off of the positions and setoff against MTM profits across 2 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.
  • The margin so collected is released along with the pay-in, including early pay-in.
5 Cross Margining

The cross margining benefit across Exchange traded Equity (Cash) and Exchange traded Equity Derivatives segments is provided to all categories of market participants.

The salient features of the cross margining facility are detailed below:

a) Positions eligible for cross-margin benefit for exact offsets

  • Index futures position in derivatives segment and constituent stock position in cash
  • Stock futures position in derivatives segment and the position in the corresponding underlying in cash segment
A basket of positions in index constituent stock/stock futures, which is a complete replica of the index in the ratio specified by BSE/ICCL, is eligible for cross margining benefit.

The number of units is changed only in case of change in share capital of the constituent stock due to corporate action or issue of additional share capital or change in the constituents of the index

b) Computation of cross margin

  • A spread margin of 25% of the total applicable margin on the eligible off-setting positions, as mentioned above, is levied in the respective cash and derivative segments.
  • Cross margining benefit is computed at client level on an online real time basis and provided to the trading member / clearing member / custodian, as the case may be, who, in turn, pass on the benefit to the client. For institutional investors, however, the cross margining benefit is provided after confirmation of trades.
  • The positions in the Capital market and Derivatives segment is considered for cross margining only till time the margins are levied on such positions.
  • While reckoning the offsetting positions in the Capital market segment, positions in respect of which margin benefit has been given on account of early pay-in of securities or funds is not considered.
c) 5.4 Separate accounts

To avail the facility of cross margining, a client may maintain two accounts with the trading member / clearing member, namely arbitrage account and a non-arbitrage account, to allow converting partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts. However, for the purpose of compliance and reporting requirements, the positions across both accounts is taken together and client shall continue to have unique client code.

d) 5.5 Default

In the event of default by a trading member / clearing member / custodian, as the case may be, whose clients have availed cross margining benefit, the Clearing Corporation shall have the option to:

  • Hold the positions in the cross margin account till expiry in its own name.
  • Liquidate the positions / collateral in either segment and use the proceeds to meet the default obligation in the other segment.
The Clearing Corporation shall enter into agreement with client/clearing member/trading member/custodian, as the case may be, clearly laying down the inter-se distribution of liability / responsibility in the event of default. The Clearing Corporation shall also specify the legal agreements between the clearing entities for the purpose of margin utilization in case of liquidation/default etc.

6 Additional Margin for Highly Volatile Stocks

For securities with Intra-day (High -Low) price movement of more than 10% in the underlying market for 3 or more days in last one month, the minimum total margins (VaR margins, Extreme Loss Margin and Additional margin) shall be equal to the maximum intraday price movement of the security observed in underlying market in last one month. The same shall be continued till expiry date of derivative contracts which falls after completion of three months from date of levy.

For securities with Intra-day (High -Low) price movement of more than 10% in the underlying market for 10 or more days in last six months; the minimum total margins (VaR margins, Extreme Loss Margin and Additional margin) shall be equal to the maximum intraday price movement of the security observed in underlying market in last six months. The same shall be continued till expiry date of derivative contracts which falls after completion of one year from date of levy.

7 Updation of Risk Parameters

The risk arrays are updated intra-day in the cash market.

The applicable VaR margin rates along with the latest traded price/ close price to arrive at the latest VaR Margin Value are updated as follows:

  • Beginning-of-Day
  • 11:00 a.m.
  • 12:30 p.m.
  • 02:00 p.m.
  • 03:30 p.m.
  • 04:00 p.m.
  • End-of-Day
8 Risk Reduction Mode

Members are compulsorily placed in risk reduction mode when a predetermined % of the member's capital is utilized towards margins. When a member moves in to risk reduction mode –
  • All unexecuted orders are cancelled
  • Only fresh orders placed by members to reduce open positions are be accepted.
  • Fresh orders placed by members that increase open positions are checked for sufficiency of margins and orders that do not satisfy sufficiency of margins are rejected.
  • Fresh orders can be placed for immediate or cancel (IOC) only
  • Members will be able to trade in normal mode as and when the utilization goes below the predetermined%.
  • Additionally Members are not allowed to place orders with custodial participant code,
  • Client and Custodial Participant code modification is not permitted.
The entry and exit threshold is detailed below:
  • Clearing Members: Put in RRM at 90% collateral utilisation & moved back to normal mode when utilisation goes below 85%.
  • Trading Members: Put on RRM at 90% utilisation of trading limit assigned by their Clearing Members & moved back to normal mode when limit utilisation goes below 85%.
9 Collection of Margins

The VaR margin, ELM, Crystallised Loss Margin, etc. are collected/adjusted on an upfront basis from the Liquid Assets of the Clearing Member on an on-line real time basis. The said margins are 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 is no netting of positions across different settlements.

The MTM margin is collected from the members first by adjusting the same from the available cash and cash equivalent component of the liquid assets and the balance MTM in form of cash from the members through their clearing banks before the start of the trading of the next day.

In case of Institutional transactions the margins are collected on T+1 day, subsequent to confirmation of the transactions by the custodians. The margins shall be levied on the custodial clearing members in respect of those institutional transactions confirmed by them. In respect of the institutional transactions rejected/not confirmed by the custodians the margins on same would be levied on the concerned clearing member who has cleared the transaction.

10 Capping of margins

In case of a buy transaction in cash market, VaR margins, Extreme loss margins and mark to market losses together shall not exceed the purchase value of the transaction.

In case of a sale transaction in cash market, VaR margins and Extreme loss margins together shall not exceed the sale value of the transaction and mark to market losses shall also be levied.

11 Exemption from margins

The exemption from margins are given in cases where early pay-in of securities and funds is made, the outstanding position to the extent of early pay-in are not considered for margin purposes. Clearing Members have the facility to do early pay-in of securities and funds prior to execution of trade / after execution of the trade.

12 Release of blocked margins

The above-referred margins so collected are released on completion of pay-in of the respective settlement.

13 Margin Shortfall

Clearing Members shall maintain adequate liquid assets with ICCL at all point of time to cover their margin requirements. In case of de-activation of the trading terminal during a trading session in the Equity Cash Segment on account of margin shortfall, the same shall attract fines / penalties or such disciplinary action as may be specified from time to time.