The liquid assets placed by the members with exchange /clearing corporation as collateral plays a significant role in risk management. All the liquid assets need to fulfill the below criteria laid down by SEBI at all point of time to qualify:
| Group (Parameter) | Liquid Securities (Group I) | Less Liquid Securities (Group II) | Illiquid Securities (Group III) |
|---|---|---|---|
| Trading frequency for previous 6 months * | At least 80% of the days | At least 80% of the days | Less than 80% of the days |
| Impact Cost for previous 6 months * | Less than or equal to 1% | More than 1% | N/A |
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Note: 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. |
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For the first month and till the time of monthly review as mentioned in monthly review, a newly listed stock shall be categorized 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 cost of the security shall be computed, to determine the liquidity categorization of the security.
In case any corporate action results in a change in ISIN, then the securities bearing the new ISIN shall be treated as newly listed scrip for group categorization.
The category for each security and applicable period is disseminated to members on the SFTP server and to the public at large through the Exchange website www.MSEI.in. 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.
MTM margins shall be collected from the members as a security towards their future settlement obligations. MTM margin is collected only wherein the transaction price is less than the end of the day close price of the security. If the security is not traded for the day, then close price would be latest available close price. Mark to Market Losses shall be collected in the following manner:
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 clearing corporation 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:
The VaR Margins are specified as follows for different groups of securities:
| Liquidity Categorization | One-Day VaR | Scaling factor for illiquidity | VaR Margin |
|---|---|---|---|
| Liquid Securities (Group I) | Security VaR | 1 | Security VaR |
| Less Liquid Securities (Group II) | Higher of Security VaR and three times Index VaR | 1.73 (square root of 3.00) | Higher of 1.73 times Security 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 |
The VaR margin shall be collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade. Collection on T+1 day is not acceptable.
ELM is used to tackle the situations where in the losses go beyond those envisaged in the 99% value at risk estimates used in the VaR margin. ELM is also popularly known as "exposure limits" and "second line of defence".
All Institutional trades in the cash market would be subject to payment of margins as applicable to transactions of other investors. For this purpose institutional investors shall include
All institutional trades in the cash market would be margined on a T+1 basis with the margin being collected from the custodian upon confirmation of trade. These trades would be identified by the use of Custodial Participant (CP) Code at the order entry.
Custodian has to confirm these trades if it is not confirmed then these trades shall be treated as normal trades and applicable margin shall be levied on these trades. Members can enter order by selecting order as INST and keeping Custodial Participant (CP) Code as blank at the time of entering orders on behalf of the institutional clients and they have to allocate these trades to the above categories.
Margins shall be levied on client level on the members who have executed Institutional Trades which have been not accepted or rejected.
A member can avail the margin exemption by choosing securities and funds early pay in option. The early pay in of securities and funds give an opportunity to member/clients to deliver the stock before the settlement date and release the blocked margin for utilization.
For the purpose of monitoring members who have high capital utilizations, the methodology as specified hereunder shall be adopted, or such other methodology as may be specified by the relevant authority from time to time
