NATIONAL STOCK EXCHANGE OF INDIA LIMITED

 

 

Circular No. NSCC/CMP/423                                                 Dated: May 9, 2005

_______________________________________________________________________

                                                                                               

Circular No NSCC/CM/C&S/337 dated May 9, 2005 issued by National Securities Clearing Corporation Limited (NSCCL) to the Clearing Members of NSCCL is enclosed. All Trading Members of the Exchange who are also the Clearing Members of the Clearing Corporation are required to comply with the said Circular and any modifications thereto as may be issued by the Clearing Corporation from time to time.  Non-compliance with the said Circular will be treated as breach of the Rules, Bye-Laws and Regulations of the Exchange. The Clearing Corporation will monitor the compliance and take suitable action for non - compliance.

 

 

For National Stock Exchange of India Limited

 

 

 

Suprabhat Lala

Manager


NATIONAL SECURITIES CLEARING CORPORATION LIMITED

CAPITAL MARKET CLEARING & SETTLEMENT

 

DOWNLOAD REF NO: NSE/CMPT/6122

Ref No: NSCC/CM/C&S/337                                                 May 9, 2005

 To,

All Members / Custodians

Subject:  Cash Market - Risk Management Framework

 

This is in partial modification of our circular consolidated circular no NSCC/CM/C&S/293 (CMPT 4991) dated April 16, 2004, circular no NSCCL/SEC/2004/1084 (CMPT 5591) dated November 11, 2004, circular no NSCCL/SEC/2005/0169 dated 17 Feb, 2005 and in continuation to our earlier circular no. NSCCL/RMG/181 (CMPT 5868) dated February 24, 2005 wherein the SEBI circular SEBI/MRD/DoP/SE/Cir-07/2005 dated February 23, 2005 was intimated.

 

The detailed provision with respect to revised framework of risk management in the cash market is enclosed as Annexure.

 

The effective date for implementation shall be informed subsequently.

 

Members are advised to take note of the same.

 

In case of any clarifications, members are requested to contact Mr. Huzefa M. /Mr. Rajesh B.L.V on telephone number 26598266.

 

Yours faithfully,

For National Securities Clearing Corporation Limited

  

 

Farzana Khan

Manager

 

 


Annexure – I

 

 

Detailed Provision of Risk Management Framework for the Cash Market

 

1            Overview:

 

The core of the risk management system is the liquid assets deposited by members with the exchange/clearing corporation. These liquid assets shall cover the following four requirements:

 

a.       MTM (Mark To Market) Losses

b.      VaR Margins

c.       Extreme Loss Margins

d.      Base Minimum Capital: Base Minimum capital shall be Rs.10 lakhs or such other amount as may be specified by the relevant authority from time to time.

 

At all points of time, the liquid assets of the member shall be adequate to cover all the above four requirements.

 

2           Liquid Assets:

 

The acceptable liquid assets and the applicable haircuts are listed below:

 

Item

Haircut

Cash Equivalents

Cash

0

Bank fixed deposits

0

Bank guarantees  

0

Securities of the Central Government

10%

Units of liquid mutual funds or government securities mutual funds

10%

 

Other Liquid Assets

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

Mutual fund units other than those listed under cash equivalents

Same as the VaR margin for the units computed using the traded price if available, or else, using the NAV of the unit treating it as a liquid security.

 


 

Notes:

A.     Cash equivalents shall be at least 50% of liquid assets. This would imply that Other Liquid Assets in excess of the total Cash Equivalents would not be regarded as part of Total Liquid Assets.

B.     The above collaterals shall be accepted subject to limits specified from time to time.

C.     List of approved securities, units of mutual funds, the empanelled banks etc. shall be as notified by Clearing Corporation from time to time.

D.     The valuation of the liquid assets shall be done on a daily basis at latest available closing price or such other price as the may be decided from to time.

 

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

Not Applicable

 

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 security.

 

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 first  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 security shall be categorised in that Group where the market capitalization of the newly listed security exceeds or equals the market capitalization of 80% of the securities 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 security for group categorization.

 

3.3     Calculation of mean impact cost

 

The mean impact cost shall be calculated in the following manner:

a.       Impact cost shall be calculated by taking four snapshots in a day from the order book in the past six months. These four snapshots shall be randomly chosen from within four fixed ten-minutes windows spread through the day.

b.      The impact cost shall be the percentage price movement caused by an order size of Rs.1 Lakh from the average of the best bid and offer price in the order book snapshot. The impact cost shall be calculated for both, the buy and the sell side in each order book snapshot.

c.       The methodology for computation of the impact cost adopted shall be disseminated on the website of the exchange.

 

The category for each security and applicable period shall be disseminated to members on the extranet server and to the public at large through the NSE – website

 

4           Mark to Market Losses:

 

Mark to market losses shall be collected in the following manner:

 

a.       Mark to market loss shall be 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 shall 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 shall be considered as notional loss for the purpose of calculating the mark to market margin payable.

b.      The mark to market margin (MTM) shall be collected from the member before the start of the trading of the next day. 

c.       The MTM margin shall also be collected/adjusted from/against the cash/cash equivalent component of the liquid net worth deposited with the Exchange.

d.      The MTM margin shall be 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. 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.

  1. There would be no netting off of the positions and setoff 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 setoff against MTM profits would be permitted.

 

f.        The methodology for computation of MTM margin is also illustrated by way of an example which is placed in Annexure II.

g.       In case of Trade for Trade Segment (TFT segment) each trade shall be marked to market based on the closing price of that security.

h.       The MTM margin so collected shall be released on completion of pay-in of the settlement.

  1. The details of all margins (VAR, extreme loss margin and mark to market) as at end of each day will be downloaded to members in their respective Extranet directory. The format of the report has been provided in Annexure III

 

5           VaR Margin:

 

5.1     Computation of VaR Margin

 

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 securities, the margin covers one-day losses while for illiquid securities, 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 securities.

 

For liquid securities, the VaR margins are based only on the volatility of the security while for other securities, 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 sigmas.

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

 

Liquidity Categorization

One-Day VaR

Scaling factor for illiquidity

VaR Margin

Liquid Securities (Group I)

Security VaR

1.00

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

 

5.2     Collection of VaR Margin:

 

a.       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.

b.      The VaR margin shall be 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. Example for computation of gross positions of a member is provided in Annexure IV.

c.       For this purpose, there would be no netting of positions across different settlements.

d.      In case of securities in Trade for Trade segment (TFT segment) VaR as applicable to Group 3 (illiquid securities) shall be applicable.

e.       VaR margin rate for each security shall be disseminated at the end of each trading day and the same shall be applicable on the positions for next trading day. The data shall be made available in the extranet server and to the public at large through the NSE – website by 6.30 pm at the end of each trading day. File format for VaR based margin rates is given in Annexure V.

f.        The VaR margin so collected shall be released on completion of pay-in of the settlement.

  1. The details of all margins (VAR, extreme loss margin and mark to market) as at end of each day will be downloaded to members in their respective Extranet directory. The format of the report has been provided in Annexure III.

 

6           Extreme Loss Margin:

 

The term Extreme Loss Margin replaces 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 security shall be higher of:

·        5%, or

· 1.5 times the standard deviation of daily logarithmic returns of the security 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 liquid assets of the member on a real time basis.

c.       The Extreme Loss Margin shall be 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. Example for computation of gross positions of a member is provided in Annexure IV.

d.      For this purpose, there would be no netting off of positions across different settlements.

e.       The Extreme Loss Margin collected shall be released on completion of pay-in of the settlement

  1. The details of all margins (VAR, extreme loss margin and mark to market) as at end of each day will be downloaded to members in their respective Extranet directory. The format of the report has been provided in Annexure III.

 

7        Exemption from margins:

 

a.       Institutional businesses i.e., transactions done by all institutional investors shall be exempt from margin payments. For this purpose, institutional investors shall include

·        Foreign Institutional Investors registered with SEBI. (FII)

·        Mutual Funds registered with SEBI. (MF)

·        Public Financial Institutions as defined under Section 4A of the Companies Act, 1956. (DFI)

·        Banks, i.e., a banking company as defined under Section 5(1)(c) of the Banking Regulations Act, 1949. (BNK)

·        Insurance companies registered with IRDA. (INS)

 

b.      In cases where early pay-in of securities is made prior to the securities pay-in, such positions for which early pay-in (EPI) of securities is made shall be exempt from margins. The EPI would be allocated to clients having net deliverable position, on a random basis. However, members shall ensure to pass on appropriate early pay-in benefit of margin to the relevant clients.

 

8        Institutional Transactions:

·        Institutional  transactions shall be identified by the use of the participant code at the time of order entry.

·        Transactions entered into on behalf of custodial participants i.e. carrying custodial participant code shall be considered as institutional deals unless not confirmed by the respective custodians in which case the transactions shall be considered as a normal transactions and all applicable margins shall be levied on the members.

·        Non-Custodial Institutional Transactions shall be identified by the use of the participant code ‘NCIT’. The ‘NCIT’ transaction  shall be exempted only for margin purposes and the settlement obligation  shall remain with the member. Non-Custodial Institutional transactions, which are not marked, as ‘NCIT’ at the time of order entry,  shall not be exempt  from margins.

·        Members are required to enter only the above five categories, if applicable, while reporting NonCustodial Institutional deals (NCIT) and contraction of unallocated OTRs.

·        Reporting and other procedures regarding ‘NCIT’ and Institution transactions shall  continue  as per the current procedure.

 

9        Retail Professional Clearing Member:

In case of transactions which are to be settled by Retail Professional Clearing Members (PCM), all the trades with PCM code shall be included in the trading member’s positions till the same are confirmed by the PCM. Margins shall be collected from respective trading members until confirmation of trades by PCM.

On confirmation of trades by PCM, such trades will be reduced from the positions of trading member and included in the positions of PCM. The PCM shall then be liable to pay margins on the same.

 

10    Shortfall of Margins:

In case of any shortfall in margin:

·        The members shall not be permitted to trade with immediate effect.

·        A penalty of Rs.5000/- will be levied for violation of margin which shall be paid by next day. In case of subsequent violations during the day, penalty shall be increased by Rs.5000/- for each such instance. (For example in case of second violation for the day the penalty levied will be Rs.10000/-, Rs.15000/- for third instances and so on).The penalty will be debited to the clearing account of the member. 

·        Penal charge of 0.07% per day shall be levied on the amount of overnight margin shortages.

·        Penalty points shall also be imposed on the member, depending upon the quantum of violation as given below:

 

Sr. No

Margin Violation

Penalty Points

(a)

Value Rs.5 lakhs or more

4

(b)

Value less than Rs.5 lakhs

2

 

Action for the total penalty points is as given below:

 

Penalty Points

Penalty

0 to 20

No action

21 to 30

Reprimand letter

31 to 50

A fine of Rs. 2000/- per point over 30 points

51 to 100

A fine of Rs. 5000/- per point over 30 point’s plusRs. 40,000

Over 100

Blocking 75% of the total deposits of the member available towards margins for the next 10 settlements in normal regular market *

 

* If the total penalty points exceed 100 due to the penalty points on account of non-reporting / non allocation of institutional trades, monetary penalty will be levied on the total penalty points at the rate applicable to the highest monetary slab. However, the Exchange may consider blocking 75% of the total deposits of the member available towards margins for the next 10 settlements in normal regular market in place of monetary penalty, if requested for by the trading member under exceptional circumstances, within 4 days of download of the consolidated penalty bill, subject to the genuineness of the circumstances.

 

In addition to the above, a penal interest at the rate of 9 basis points for each day of default shall be levied to the members who have not paid the penalty imposed on them. 

 

 

11    Shortfall of Funds Pay-in:

Trading and/or clearing facility of members failing to fulfill their funds obligations in all markets including the valuation debit raised on account of securities shortages to Clearing Corporation shall be withdrawn. Further, securities pay-out, due to such clearing member shall also be withheld.

 

The above provisions shall apply if net cumulative fund shortage for a member is:

1.      Equal to or greater than Rs. Five (5) lakhs at the end of pay-in.

  1. Equal to or greater than Rs. Two (2) lakhs for six (6) or more occasions in the last three (3)  months on any given day

In case, the member is disabled on account of (2) above, on making good the shortage amount, the member shall be permitted to trade subject to its  providing a deposit equivalent to its  cumulative funds shortage as the 'funds shortage collateral'. Such deposit   shall be kept with the Clearing Corporation for a period of ten settlements and shall be released only if no further funds shortages are reported for the member in next ten consecutive settlements. Members may further note that there shall not be any margin benefit or any interest payment on the amount so deposited as 'funds shortage collateral'. The amount may be provided by way of cash, fixed deposit receipts, or bank guarantee, equivalent to the cumulative funds shortage.

 

All other penalties in case of fund shortage as currently applicable shall continue to be levied.

 

12    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.


 

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 securities can be set off/netted against profits of some other securities. 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 have to be collected and same will not be setoff against profit arising out of positions of the other day.

 

Thus, as stated above MTM profits / losses would be computed for each of the clients; Client A, Client B, Client C etc. As regards collection of margin from the broker, the MTM would be grossed across all the clients i.e. no setoff of loss of one client with the profit of another client. In other words, only the losses will be added to give the total MTM loss that the broker has to deposit with the exchange.

 

Client

Security

T-1 day

T day

 

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

 

 

 

 

 

 

 

 

 

 

Client C

Security X

1000

500

 

 

 

 

 

Security Z

-1500

-800

 

 

 

 

 

Total

-500

-300

 

-800

 

 

 

 

 

 

 

 

 

 

Client D

Security Y

700

-200

 

 

 

 

 

Security R

-300

800

 

 

 

 

 

Total

400

600

 

1000

 

 

 

 

 

 

 

 

 

 

Member

 

 

 

 

 

 

-2000

 

In this example, the broker has to deposit MTM Margin of Rs 2000.

 

 


                              Annexure – III

 

File Format for Detail Margin File

File location

This file would be generated and disseminated everyday on the extranet server in the member’s report directory

 

Naming convention:

C_MG02_<mem_cd>_DDMMYYYY.csv.gz

 

Where DDMMYYYY - Is the report date

 

The file will be CSV file.

Client wise, security wise margin record

Record Type – Value will be 10

Client Code

Security Symbol

Security Series

Settlement Type

Settlement Number

Buy Qty

Buy Value

Sell Qty

Sell Value

Net Open Qty

Net Open value

MTM Price

MTM Profit/Loss

Margin Amount

Client wise, mark to market record

Record Type – Value will be 20

Client Code

Settlement type

Settlement Number

MTM Profit/ Loss

Client wise, total margin record

Record Type – Value will be 30

Client Code

Margins

MTM Loss

Total Margins

Security wise, margin record

Record Type – Value will be 40

Security Symbol

Security Series

Open Qty

Open value

Margin %

Margin

Member wise, total margin record

Record Type – Value will be 50

Margins

MTM Loss

Total Margins


Annexure – IV

 

Example for computation of Gross positions of a member:

                                                                                              Value in Rs.

Client

Security

Settlement

Buy Value

Sell Value

Net Value

Client A

Security X

2005001

1000

1100

-100

 

Security Y

2005002

3000

2550

450

 

 

 

 

 

 

Client B

Security Z

2005001

1500

1650

-150

 

Security Y

2005002

3000

1650

1350

 

 

 

 

 

 

Client C

Security X

2005001

4500

2400

2100

 

Security Z

2005002

7000

10450

-3450

 

 

 

 

 

 

Proprietary Position

Security Y

2005001

250

1200

-950

 

Security Z

2005002

1050

0

1050

 

 

 

 

 

 

Member’s Gross Position

 

 

 

 

 

 

Security X

2005001

 

 

2200

 

Security Y

2005001

 

 

950

 

Security Z

2005001

 

 

150

 

Security X

2005002

 

 

0

 

Security Y

2005002

 

 

1800

 

Security Z

2005002

 

 

4500

 

 


                              Annexure – V

 

File Format for VAR Margin File

 

File location

This file would be generated and disseminated everyday on the extranet server in the common/varrate directory

 

Naming convention:

C_VAR1_ddmmyyyy.DAT

 

Control Record

 

Field name

Length

Mandatory/optional

Description

Record type

Char(2)

Mandatory

Value is 10

Date

Char(8)

Mandatory

Date on which file is generated

Daily Index VAR

Number(5,2)

Mandatory

 

Total records

Number(7)

Mandatory

Total no. of detail record

 

 

Detail Record

 

Field name

Length

Mandatory/optional

Description

Record type

Char(2)

Mandatory

Value is 20.

Sec symbol

Char(10)

Mandatory

 

Sec series

Char(2)

Mandatory

 

ISIN

Char(12)

Mandatory

 

Security VAR

Number(5,2)

Optional

 

Index VAR

Number(5,2)

Optional

 

VAR margin

Number(5,2)

Mandatory

 

Extreme loss rate

Number(5,2)

Mandatory

 

Ad-hoc margin

Number(5,2)

Mandatory

 

Daily margin rate

Number(5,2)

Mandatory