As mandated by SEBI, the Value at Risk (VaR) margining system, which is internationally accepted as the best margining system, is applicable on the outstanding positions of the members in all scrips.
a) The 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 stocks, the margin covers one-day losses while for illiquid stocks, it covers three-day losses so as to allow the Exchange to liquidate the position over three days. This leads to a scaling factor of square root of three for illiquid stocks.
For liquid stocks, the VaR margins are based only on the volatility of the stock while for other stocks, the volatility of the market index is also used in the computation. Computation of the VaR margin requires the following definitions:
* Scrip sigma 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.
* Scrip VaR means the higher of 7.5% or 3.5 scrip sigmas.
* Index sigma means the daily volatility of the market index (S&P 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.
* Index VaR means the higher of 5% or 3 index sigmas. The higher of the Sensex VaR or Nifty VaR would be used for this purpose.
The VaR Margins are specified as follows for different groups of stocks:
Liquidity Categorization
One-Day VaR
Scaling factor for illiquidity
VaR Margin
Liquid Securities (Group I)
Scrip VaR
1.00
Scrip VaR
Less Liquid Securities (Group II)
Higher of Scrip VaR and three times Index VaR
1.73
(square root of 3.00)
Higher of 1.73 times Scrip VaR and 5.20 times Index VaR
Illiquid Securities (Group III)
Five times Index VaR
1.73
(square root of 3.00)
8.66 times Index VaR
b) The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade.
c) The VaR margin is collected on the gross open position of the member. The gross open position for this purpose is the gross of all net positions across all the clients of a member including his proprietary position.
d) For this purpose, there would be no netting of positions across different settlements.
e) Dissemination of Information :
The VaR amount applicable in respect of the scrips would be disseminated on the website of the Exchange on a daily basis.
* Mark to Market Margin (MTM) :
1. The MTM 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 his proprietary position. For this purpose, the position of a client is netted across his various securities and the positions of all the clients of a broker is grossed. Further, there is no netting across two different settlements.
2. There is no netting off 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.
* Extreme Loss Margin
The term Extreme Loss Margin replaces the terms "exposure limits" and "second line of defence" that have been used hitherto. It covers the expected loss in situations that go beyond those envisaged in the 99% value at risk estimates used in the VaR margin.
1. The Extreme Loss Margin for any stock is higher of: * 5%, and
* 1.5 times the standard deviation of daily logarithmic returns of the stock 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.
2. 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 his proprietary position.
3. For this purpose, there is no netting of positions across different settlements.
d. Dissemination of Information :
The ELM amount applicable in respect of the scrips is disseminated on the website of the Exchange on a daily basis.
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