In order to contain the risk arising out of transactions entered into by the members in various Securities either on their own account or on behalf of their clients, BSE has a well designed risk-management system which inter-alia, includes collection of margins from the Members. BSE accordingly imposes various kinds of margins on the Members based on their outstanding positions in the market. The margining system followed by BSE is described below :

Computation of Margins

For securities that have been listed for less than six months, the trading frequency and the impact cost is computed using the entire trading history of the Security.

VaR Margin

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 Securities.

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:

Security 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.

Security VaR means the higher of 7.5% or 3.5 Security sigma.

Index sigma

means the daily volatility of the market index (S&P BSE Sensex or CNX Nifty) 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 sigma. 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:



Collection of VaR Margin :

• The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the Member at the time of trade.
• 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.
• For this purpose, there would be no netting of positions across different settlements.
• Dissemination of Information :

The VaR amount applicable in respect of the Securities is disseminated on the BSE website on a daily basis.

Extreme Loss Margin :

The term Extreme Loss Margin replaces the terms "exposure limits" and "second line of defense" 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.

• 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.
• 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 means the gross of all net positions across all the clients of a member including his proprietary position.
• For this purpose, there is no netting of positions across different settlements.
• The Extreme Loss margin so collected is released alongwith the pay-in.
• Dissemination of Information :
  
The ELM amount applicable in respect of the Securities is also disseminated on the BSE website.

Special Margin

Special margin may be imposed by BSE from time to time on certain Securities as a surveillance measure and informed to the Members through notices.

Mark-to-Market Margin (MTM) :

• 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 Member is grossed. Further, there is no netting across two different settlements.
• 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.

Collection and Release of Margins

All statements pertaining to daily margins viz., VaR, MTM, ELM and Special Margin computed by BSE on the outstanding positions of the Members are available for downloading by them in their back-offices at the end of the day.

VaR Margin

The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the Member at the time of trade.

Extreme Loss Margin (ELM)

The ELM is collected/ adjusted from the total liquid assets of the Member on a real time basis.

Mark-to-Market Margin (MTM)

The MTM 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 is considered as the closing price. MTM margins is also 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 is adjusted in the MTM obligation of the Member for the day. Such MTM is collected from the Members in the evening on the T day itself, 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 on the same day.

Special Margins

The Special Margin as applicable is collected along with MTM from the Members, first, by adjusting the same from the available liquid assets and the balance Special Margin in form of cash from the Members through their clearing banks on the same day.

Release of Margins

The above-referred margins are released on completion of pay-in of the settlement

Fines / Penalty for Margin Default

Cases where there are insufficient balances in bank accounts of the Members at the time of debit of margin amounts payable in cash on the relevant day, are treated as margin defaults. The norms for levy of fines/ penalty for delay in clearance of margin obligations are as follows :

Exemption from Payment of Margins

The following trades executed on the BOLT are exempted from payment of margins on Trade Day. However the same are margined to the Custodians/members on T+1 day in case of acceptance / rejection of the 6A7A entry:

• Institutional business. For this purpose, institutional investors include :
• Foreign Institutional Investors registered with SEBI.
• Mutual Funds registered with SEBI.
• Public Financial Institutions as defined under Section 4A of the Companies Act, 1956.
• Banks, i.e., a banking company as defined under Section 5(1)(c) of the Banking Regulations Act, 1949
.
• Insurance companies registered with IRDA
.
• Pension Funds
• In cases where early pay-in of securities is made, the outstanding position of the client to the extent of early pay-in.

Early Pay-in Facility

• The early pay-in of securities done upto 3.45 p.m. on a day are considered for on-line release of blocked liquid assets on account of margins on that day. The benefits of early pay-in done after 3.45 p.m. on a day are available on the next trading day.
• Members are also able to do early pay-in of securities before execution of the trade on T day to avail benefit of margin exemption.

For availing the benefits of margin exemptions through early pay-in of securities, the members are required to upload a file containing details in respect of the early pay-in at client level to the Clearing House-BOISL (Notice No.20050526-20). The details in the file is matched against the transaction files received from CDSL and NSDL. Only the matched records are uploaded for Early Pay-In.

User manual for Early Pay-in of Securities - CLASS System

 

SEBI has advised BSE to build an administrative mechanism to encourage members to hold capital cushions while operating in the Cash and Derivatives Segments. Accordingly, the following methodology, as advised by SEBI, is being followed by BSE:

• At the end of each calendar month, Members who have exceeded 90% of utilization of capital during the day for more than 7 days in the current month are identified.
• In the derivatives segment, the utilisation is monitored after considering initial margins, exposure margins and premium.
• The capital requirement to bring the utilisation to a level of 85% at the time of violating the trigger point of 90% on each of those occasions is noted for the Members. The highest of such amounts for the identified members during the month is called for as additional capital.
• The requirement is communicated to the members on the first day of the subsequent month.
• The Members are provided a time limit of three working days to provide the amount of additional capital in the form of Cash, FDRs and Bank Guarantees only.
• The additional capital so collected is retained with the Clearing House for a period of one calendar month.
• No benefit including exposure, margin etc is available to the Member on the amount of additional capital so collected.
• In case of non- payment of additional capital within the stipulated time limit a penalty as applicable for funds shortage is levied on the Member for the period of default.
• In case a Member is liable to provide additional capital in the subsequent month, the amount of additional capital shall be recomputed and the excess /deficit is refunded /called for.

SEBI has advised BSE to build an administrative mechanism to encourage members to hold capital cushions while operating in the Cash and Derivatives Segments. Accordingly, the following methodology, as advised by SEBI, is being followed by BSE:

• At the end of each calendar month, Members who have exceeded 90% of utilization of capital during the day for more than 7 days in the current month are identified.
• In the derivatives segment, the utilisation is monitored after considering initial margins, exposure margins and premium.
• The capital requirement to bring the utilisation to a level of 85% at the time of violating the trigger point of 90% on each of those occasions is noted for the Members. The highest of such amounts for the identified members during the month is called for as additional capital.
• The requirement is communicated to the members on the first day of the subsequent month.
• The Members are provided a time limit of three working days to provide the amount of additional capital in the form of Cash, FDRs and Bank Guarantees only.
• The additional capital so collected is retained with the Clearing House for a period of one calendar month.
• No benefit including exposure, margin etc is available to the Member on the amount of additional capital so collected.
• In case of non- payment of additional capital within the stipulated time limit a penalty as applicable for funds shortage is levied on the Member for the period of default.
• In case a Member is liable to provide additional capital in the subsequent month, the amount of additional capital shall be recomputed and the excess /deficit is refunded /called for.

The BOLT TWSs of a Member are deactivated for non-payment / late payment of margins or settlement dues or on apprehension of financial difficulties or on detection of serious irregularities or for frequent violations of trading restrictions. Such decisions are taken on a case-to-case basis. The overall objective in resorting to this ultimate step is to ensure that questionable trading behavior of a Member does not compromise the safety of the market or jeopardize the integrity of the market.