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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 ..... arket 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 take such timely actions as and when necessary. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 Same as the VaR margin for the units computed using the traded price on stock exchange, if available, or else, using the NAV of the unit treating it as a liquid security (see section 5.1 below). Card value of eligible exchanges (see Note F) 50% if the last sale or auction of card in the exchange took place during the last six months. 75% if the last sale or auction of card in the exchange took place during the last twelve months but not within the last six months. 100% if no sale or auction of card in the exchange has taken place during the last twelve months. Eligible only for Extreme Loss Margin Notes: A. The valuation of the liquid assets shall be done o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 N/A Notes: A. For securities that have been listed for less than six months, the trading frequency and the impact cost shall be computed using the entire trading history of the scrip. 3.1 Monthly Review The trading frequency and impact cost shall be calculated 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 shall move from one group to another group from the 1st of the next month. 3.2 Categorisation of newly listed securities For the first month and till the time of monthly review as mentioned in section 3.1, a newly listed stock shall be categorised 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liquid net worth deposited with the Exchange. c. The MTM 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 proprietary position. For this purpose, the position of a client would be netted across his various securities and the positions of all the clients of a broker would be grossed. Further, there would be no netting across two different settlements. d. There would be no netting off the positions and setoff against MTM profitsacross 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 would be permitted. e. The methodology for computation of MTM margin is also illustrated by wayof an example which is placed in Annexure II. f. The margin so collected shall be released along with the pay-in, including early pay-in of securities. 5 VaR Margin 5.1 Computation of VaR Margin 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. a. The Extreme Loss Margin for any stock shall be 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 shall be 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 shall be applicable for the next month. b. The Extreme Loss Margin shall be collected/ adjusted against the total liquidassets of the member on a real time basis. c. The Extreme Loss 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 proprietary position. d. For this purpose, there would be no netting of positions across different-settlements. e. The Extreme Loss Margin so collected shall be released along with the pay-in. 7 Exemption from margins a. Institutional businesses i.e., transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover is less than ₹ 1 crore for any three consecutive months. B. Refund of excess BMC over ₹ 1 lakh The excess of the BMC over ₹ 1 lakh may be refunded to the members of the exchange subject to the following conditions: a. The member has been inactive at the stock exchange for the past 12months, i.e. he has not carried out any transaction on that stock exchange during the past 12 months. b. There are no investor complaints pending against the member. c. There are no arbitration cases pending against the member. d. The exchange shall retain/deduct/debit from the BMC to be refunded,the amount of any complaints/claims of the investors against the member and for dues crystallized and contingent to the exchange/SEBI arising out of pending arbitration cases, appealed arbitration awards, administrative expenses, SEBI turnover fees, e.t.c. e. The exchange shall ensure that the member has paid the SEBIturnover fees and has obtained a No-Objection Certificate (NoC) from SEBI in this regard. C. Re-enhancement of BMC If the average daily turnover of the exchange exceeds the prescribed level of ₹ 1 crore for a period of one month at any time, the exchange sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated vide circular No. SMDRP/Policy/Cir-19/99 dated July 2, 1999. e. The provisions regarding Bank Guarantee stipulated vide Circular No.22/2003 dated June 11, 2003. f. The provisions relating to usage of stock exchange membership card value stipulated vide circular No. SEBI/MRD/SE/Cir- 25/2004 dated July 22, 2004. g. The provisions relating to handling of pay-in shortfall stipulated vide CircularNo. SEBI/SMD/SE/21/2003/05/06 dated June 05, 2003. h. The provisions of collection of margins from clients stipulated vide circulars No. SMDRP/policy/Cir-35/98 dated December 4, 1998, SMDRP/Policy/Cir7/00 dated February 4, 2000, SMDRP/Policy/Cir-33/00 dated July 27, 2000 and SMDRP/Policy/Cir-12/2002 dated May 17, 2002. Annexure - II Methodology for computation of MTM Margin For a Client A, his MTM profit/ loss would be calculated separately for his positions on T-1 and T day (two different rolling settlements). For the same day positions of the client, his losses in some scrips can be set off/netted against profits of some other scrips. Thus, we would arrive at the MTM loss/profit figures of the two different days T and T-1. These two figures cannot be netted. Any loss will ..... X X X X Extracts X X X X X X X X Extracts X X X X
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