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RISKMANAGEMENT

IN STOCKEXCHANGES

Tapas Das

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WHAT IS RISK?

Uncertainty. An event may or may not happen.

Types of Risk?

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TYPES OF RISK

Credit Risk / Counterparty Risk

Price Risk

Liquidity Risk

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CREDITRISK

Lending Risk

Direct Lending : Loans/Credit cards/Mortgages

Contingent : Letter of Credit / GuaranteesCounterparty

PresettlementSettlement

Issuer : Underwriting & Issuer activitiesClearing

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RISKMANAGEMENT STRUCTURED SYSTEM OF MARGINING Types

Value at Risk Margin

Extreme Loss MarginMark to Market margin

Margining at Client level (Gross level)

Margins can be paid in any form of eligible collateralCashFixed deposit receipts

Bank guaranteesGovernment securities and

Securities

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RISKMANAGEMENT ONLINE& OFFLINE SURVEILLANCE

Online SurveillanceTraded price > than certain % of Last traded PriceIntra-day high low variation beyond threshold

Large order compared with floating stock of the companySecurities trading close to or hitting price band

Offline SurveillancePlot of price/volume charts and analyze crests & troughsDetermine the participants during the shortlisted period

Building time sequence programs (patterns) to ascertainmanipulation.

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F&O RISKMANAGEMENT

Real time Upfront portfolio based margins

Based on 99% VaR

Client level monitoring

Revision of parameters 6 times

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LIQUID ASSETS

Comprises of Cash and Non Cash

Ratio of 50:50 to be maintained

Minimum liquid Net Worth Rs.50 lacs

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FACTORS AFFECTING VALUE OF AN OPTION

Underlying market price

Strike Price

Volatility of the underlying instrumentTime to expiry

Interest Rate

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PREMIUM MARGINS

To be paid by a buyer of an option

Till the premium settlement is complete

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ASSIGNMENTMARGINS

To be paid on assigned positions

Both for Interim and Final Exercise Settlement

Till such obligations are fulfilled

levied at Clearing Member level

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EXPOSUREMARGIN

Exposure LimitsOptions : Only short positionsFutures : For both long and short positions

Applicable rates

Index Futures / Options : 3% of notional value for openpositions

Stock Futures / Options : 5% or 1.5 of notional value foropen positions

Notional value Futures : Contract priceOptions: Closing price of the security on the cash segment

on the previous day

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SETTLEMENT GUARANTEE FUND THE LAST MAN STANDING

Final

CH Cap

5th Line of Defence

SGF of other s

4th Line of Defence

Insurance

3rd Line of Defence

Interest on SGF /Profit of currentyear

2nd Line of Defence

Membership Deposit

1st Line of Defence

Margin of defaulting member -Variation/Intraday/Initial