The core of the risk management system followed in Equity Cash Segment is based on the Liquid Assets deposited by members with the Exchange/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.
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:
The trading frequency and impact cost are computed on the 15th of each month on a rolling basis considering the previous six months trading frequency and impact cost respectively. Based on the trading frequency and impact cost, the securities are moved from one group to another in the next month. In case of securities which have been listed for less than six months, the trading frequency and the impact cost are computed using the entire trading history of the security.
In case of newly listed securities, for the first month and till the monthly review as mentioned above, such securities are categorized in that group where the market capitalization of the newly listed security exceeds or equals the market capitalization of 80% of the securities in that particular group. Subsequently, after one month the actual trading frequency and impact cost of the security is computed to determine the liquidity categorization of said security. Further, in case of any corporate action declared by the company resulting in change in ISIN of the said security with a new ISIN, it is treated as a newly listed security for group categorization.
Computation of the VaR margin requires the following definitions:
The VaR Margins for different groups of securities are specified as follows:
As stipulated by SEBI, VaR files are generated intraday based on the prices at the beginning of the day, 11:00 am, 12:30 pm, 2:00 pm, and 3:30 pm (end of day) every day. Such intra-day VaR files are used for margining of intraday member positions.
The MTM margin for T day is computed after trading hours on T day on the basis of closing price, of that day. In case the security has not been traded on a particular day, the latest available closing price would be considered as the closing price. MTM margins would also be recomputed in respect of all the pending settlements on the basis of closing prices of T day and the difference due to increase/decrease in MTM margins on account of such recomputation would be adjusted in the MTM obligation of the member for the day. The MTM margin would be 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 his proprietary position. Further, there would be no netting of the positions and setoff against MTM profits across two different settlements. However, for computation of MTM profits/losses for the day, netting or setoff against MTM profits is permitted.
The VaR margin and ELM 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 aforesaid margins (VaR, ELM and MTM) 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.
For the purpose of aforesaid, institutional investors inter alia shall include:
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.
The above-referred margins so collected are released on completion of pay-in of the respective settlement.
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.
For the purpose of monitoring members having high capital utilisation, the following methodology or such other methodology as may be specified by the relevant authority from time to time is adopted to encourage members to hold capital cushions:
Clearing members are also provided a file viz, DCddmmyy.nnnn
(where dd stands for day, mm for month, yy for year and nnnn for clearing number of the member at the end of every trading day containing details of instances where the utilization of capital / limits has exceeded 90% on that day.
Also, on a monthly basis a file viz, CAmmyyyy.nnnn
is downloaded on the first day of every subsequent month containing the details of additional capital to be deposited by the members towards capital cushion requirements for exceeding 90% of utilisation of capital / limits for more than 7 days in the previous month.
The cross margining benefit across Exchange traded Equity (Cash) and Exchange traded Equity Derivatives (Derivatives) segments is provided to all categories of market participants.
The salient features of the cross margining facility are detailed below:
The positions in the derivatives segment for the stock futures and index futures shall be in the same expiry month to be eligible for cross margining benefit.
- 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 computation of cross margining benefit is done 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, shall pass on the benefit to the respective client.
- For institutional investors the positions in Capital market segment is considered only after confirmation by the custodian on T+1 basis and on confirmation by the clearing member in Derivatives segment.
- 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 be considered.
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.
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 Stock Exchange / 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 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%.