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NCFM Course in Hyderabad : Capital Market - Types of Margins
Daily margins payable by the trading members in the Cash market consists of the following:
(i) Value at Risk (VaR) margin
(ii) Mark to Market Margin
(iii) Extreme Loss Margin
The margins are computed at client level. A member entering an order needs to enter the client code. Based on this information, margin is computed at the client level, which will be payable by the trading members on upfront basis. Let us see in details what is meant by these margins.
VaR is a single number, which encapsulates whole information about the risk in a portfolio. It measures potential loss from an unlikely adverse event in a normal market environment. It involves using historical data on market prices and rates, the current portfolio positions, and models (e.g., option models, bond models) for pricing those positions. These inputs are then combined in different ways, depending on the method, to derive an estimate of a particular percentile of the loss distribution, typically the 99th percentile loss.
Mark to market loss is calculated by marking each transaction in security to the closing price of the security at the end of trading. In case the security has not been traded on a particular day, the latest available closing price at the NSE is to be considered as the closing price. In case the net outstanding position in any security is nil, the difference between the buy and sell values is considered as notional loss for the purpose of calculating the mark to market margin payable.
The mark to market margin (MTM) is collected from the member before the start of the trading of the next day. The MTM margin is collected/adjusted from/against the cash/cash equivalent component of the liquid net worth deposited with the Exchange.
The MTM margin is collected on the gross open position of the member. The gross open position means the gross of all net positions across all the clients of a member including its proprietary position. For this purpose, the position of a client would be netted across its various securities and the positions of all the clients of a broker would be grossed. There would be no netting off of the positions and set off against MTM profits across two rolling settlements i.e. T day and T-1 day. However, for computation of MTM profits/losses for the day, netting or set off against MTM profits would be permitted. In case of Trade for Trade Segment (TFT segment) each trade is marked to market based on the closing price of that security. The MTM margin so collected is released on completion of pay-in of the settlement.
The Extreme Loss Margin for any security is higher of:
(a) 5%, or
(b) 1.5 times the standard deviation of daily logarithmic returns of the security 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.
The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the member on a real time basis.
The Extreme Loss 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 its proprietary position.
There would be no netting off of positions across different settlements. The Extreme Loss Margin collected is released on completion of pay-in of the settlement.
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