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TMI BlogComprehensive Risk Management Framework for the cash marketX X X X Extracts X X X X X X X X Extracts X X X X ..... he Advisory Committee of Derivatives and Market Risk Management of SEBI (RMG), in its various meetings reviewed the extant provisions relating to margins and risk management framework in the cash market. After detailed deliberations, the RMG has recommended a comprehensive risk management framework for the cash market. The comprehensive risk management framework has been finalised after a due consultative process with the public. The revised framework for risk management in the cash market is placed in Annexures I II. 3. The Stock Exchanges shall put in place the necessary systems to ensure the operationalization of the comprehensive risk management framework with effect from May 18, 2005 and that they have tested the software and removed any glitches in its operation well before the above mentioned date to avoid any problems in the live environment. 4. While the comprehensive risk management framework is expected to contain risk in the system, the efficacy of the same will be dependent on monitoring, surveillance and timely collection of margins by the Stock Exchanges. The Stock Exchanges, are, therefore advised to strengthen their monitoring and surveillance systems and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 No limit Bank fixed deposits 0 No limit Bank guarantees 0 Limit on exchange s exposure to a single bank (see Note B) Securities of the Central Government 10% No limit Units of liquid mutual funds or government securities mutual funds (by whatever name called which invest in government securities) 10% No limit Other Liquid Assets Cannot be used for mark to market losses (see Note C) Total of Other Liquid Assets cannot exceed total of Cash Equivalents (see Note D) Liquid (Group I) Equity Shares (see section 3 for classification of equity shares on the basis of liquidity) Same as the VaR margin for the respective shares (see section 5.1 below) Limit on exchange s exposure to a single issuer (see Note E) Mutual fund units other than those listed under cash equivalents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l not be more than 15% of the total liquid assets forming part of TGF/SGF of the exchange. F. As a transitional arrangement pending demutualization of stock exchanges,the value of the membership card in eligible stock exchanges may be included as part of the member s liquid assets only to cover Extreme Loss Margin. To be eligible for this treatment, the exchange shall maintain an amount equivalent to at least 50% of the aggregate card value of all members in the form of cash and liquid assets. 3 Liquidity Categorization of Securities The securities shall be classified into three groups based on their liquidity: Group Trading Frequency (over the previous six months see Note A) Impact Cost (over the previous six months see Note A Liquid Securities (Group I) At least 80% of the days Less than or equal to 1% Less Liquid Securities (Group II) At least 80% of the days More than 1% Illiquid Securities (Group III) Less than 80% of the days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant stock exchanges for liquidating the positions of their members if necessary, on that stock exchange. If a Stock Exchange is unable to compute the mean impact cost of the scrips traded at the Exchange, as well as not been able to enter into a formal arrangement for liquidation of positions, it shall levy margins on the scrips as applicable to Group II or Group III as explained above, as classification between scrips in Group I or Group II would not be possible at that Exchange. e. The details of calculation methodology and relevant data shall be madeavailable to the public at large through the website of the exchanges. Any change in the methodology for the computation of impact cost shall also be disseminated by the exchange. 4 Mark to Market Losses Mark to Market Losses shall be collected in the following manner: a. The Stock Exchanges shall collect the mark to market margin (MTM) fromthe member/broker before the start of the trading of the next day. b. The MTM margin shall also be collected/adjusted from/against thecash/cash equivalent component of the liquid net worth deposited with the Exchange. c. The MTM margin shall be collected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 5.2 Collection of VaR Margin a. The VaR margin shall be collected on an upfront basis by adjusting againstthe total liquid assets of the member at the time of trade. Collection on T+1 day is not acceptable. b. The VaR margin shall be collected on the gross open position of themember. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deactivated. b. Pay-in shortfall i. In cases where the amount of shortage in a settlement for a trading member is in excess of the base minimum capital (BMC) prescribed, the trading facility of the member shall be withdrawn and the securities pay-out due to the member shall be withheld. ii. In cases where the amount of shortage exceeds 20% of the BMC but less than the BMC on six occasions within a period of three months, then also the trading facility of the member shall be withdrawn and the securities payout due to the member shall be withheld. iii. Upon recovery of the complete shortages, the member shall be permitted to trade subject to his providing a deposit equivalent to his cumulative funds shortage as the 'funds shortage collateral'. Such deposit shall be kept with the Exchange for a period of ten rolling settlements and shall be released thereafter. Such deposit shall not be available for adjustment against margin liabilities and also not earn any interest. The deposit may be by way of cash, fixed deposit receipts or bank guarantee. iv. The exchange may levy a penal interest of not less than 0.07% per day on the pay-in shortage of the member. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oc margins are imposed with any degree of regularity, exchanges should examine whether the circumstances that give rise to such margins can be reasonably anticipated and can therefore be incorporated into the risk management system mandated by SEBI. Exchanges are encouraged to analyse these situations and bring the matter to the attention of SEBI for further action. b. Any additional margins that the exchanges may impose shall be based onobjective criteria and shall not discriminate between members on the basis of subjective criteria. c. Transparency is an important regulatory goal and therefore every effort mustbe made to make the risk management systems fully transparent by disclosing their details to the public. 11 Margins from the 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 shall 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. 12 Resultant Modifications in the corresponding c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total profit/loss of Client MTM for broker Client A Security X 800 300 Security Y -500 -1200 Total 300 -900 -900 Client B Security Z 700 -400 Security W -1000 800 Total -300 400 -300 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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