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CHAPTER 1

DESIGN OF THE PROJECT

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DESIGN OF THE PROJECT

INTRODUCTION TO RISK MANAGEMENT

Definitions of risk:

Risk is a Hazard, a source of danger; a possibility of incurring loss or misfortune;

"drinking alcohol is a health hazard"

a venture undertaken without regard to possible loss or injury; "he saw the

rewards but not the risks of crime"; "there was a danger he would do the

wrong thing"

expose to a chance of loss or damage; "We risked losing a lot of money in

this venture"; "Why risk your life?"; "She laid her job on the line when she

told the boss that he was wrong"

the probability of becoming infected given that exposure to an infectious

agent has occurred

gamble: take a risk in the hope of a favorable outcome; "When you buy these

stocks you are gambling"

Risk is a concept that denotes a potential negative impact to an asset or some

characteristic of value that may arise from some present process or future

event. In everyday usage, "risk" is often used synonymously with the

probability of a known loss. ...

Risk management

Risk management can be defined as the culture, processes, and structures that

are directed towards the effective management of potential opportunities and adverse

effects.

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This is a broad definition that can quite rightly apply in nearly all fields of

management from financial and human resources management through to

environmental management. However in the context of contaminated sites, risk

management can be taken to mean the process of gathering information to make

informed decisions to minimise the risk of adverse effects to people and the

environment.

Risk assessment involves estimating the level of risk estimating the probability of

an event occurring and the magnitude of effects if the event does occur. Essentially

risk assessment lies at the heart ofrisk management, because it assists in providing

the information required to respond to a potential risk.

In a resource management setting, environmental risk assessment may be used to

help manage, for example:

natural hazards (flooding, landslides),

water supply and waste water disposal systems, and

Contaminated sites.

Human health risk assessment is one form of risk assessment, focusing on assessing

the risk to people and communities from hazardous substances or discharge of

contaminants.

Ecological risk assessment is another form of risk assessment that can be used to

assist management of risks to ecological values.

The focus of risk assessment for contaminated sites is usually human health, as a

large proportion of the known potentially contaminated sites are located in urban

areas. However, where valued natural environments are present, the focus of

ecological risk assessment is on assessing the risks to plants, animals and ecosystem

integrity from chemicals present at or discharging from a contaminated site.

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NEED FOR THE STUDY (RATIONALE)

Not enough studies are available on this subject and therefore risk in the trading

of the present day is not perceived and managed well by the todays trader and hence

problems of ups and downs. This study aims to bring out problems and prospects involved

in the system so that the trading community would be benefited by the findings,

conclusions and recommendations of this study. While the study is confined to Hyderabad

only, it can be extended to all India level by future projects based on the findings of this

study.

OBJECTIVES OF THE STUDY:

The objectives of the study are as follows:

Primary objectives

To know about the Risk management techniques laid down by the securities

exchange board of India.

To know the Risk management techniques adopted by ISE and about its

communication facilities for the appropriate configuration to set network. This would

link the ISE to individual brokers/members.

To study about the back up measures with respect to primary communication

facilities, in order to achieve network availability and connectivity back-up options..

To know about the settlement procedure involved in ISE and also NSDL

operations.

Secondary objectives

Clearing defining each and every term of the stock exchange trading procedures.

To make investors aware about the risk management policies lay down by SEBI.

To know how the investors are protected from fraud

To know how the settlement guarantee is given to the investors.

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SCOPE OF STUDY:

The scope of the project is to study and know about Risk management, dealt in

Inter-Connected Stock Exchange. The scope of the project is confined to ISE, NSE

operations and their Risk management tools.

The study is confined to Hyderabad only.

LIMITATIONS OF THE STUDY:

The study confines to the past 2-3 years and present system of the trading procedure in the

ISE and the study is confined to the coverage of all the related issues in brief. The data is

collected from the primary and secondary sources and thus is subject to slight variation

than what the study includes in reality.

Hence accuracy and correctness can be measured only to the extent of what the sample

group has furnished.

The study is valid only for the data collected at Hyderabad on a sample of 50 respondents.

It can be extended to all India level in future.

RESEARCH METHODALOGY

DATA COLLECTION METHODS:

The data collection methods include both the primary and secondary collection methods.

Primary collection methods : This method includes the data collection through the

face-to-face interactions with the authorized executives and members of the exchange.

Secondary collection methods: The secondary collection methods includes the

websites, news papers and so on., also the data collected from the news, magazines of

the ISE and different books issues of this study

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CHAPTER 2

REVIEW OF LITERARURE

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REVIEW OF LITERATURE

The origin of the Stock Exchanges in India can be traced back to the later half of 19th

century. After the American Civil War (1860-61) due to the share mania of the public, the

number of brokers dealing in shares increased. The brokers organized an informal

association in Mumbai

named The Native Stock and Share Brokers Association in 1875.later evolved as

Bombay stock exchange .

Increased activity in trade and commerce during the

First World War and Second World War resulted in an increase in the stock trading. The

Growth of Stock Exchanges suffered a set after the end of World War. World wide

depression affected them most of the Stock Exchanges in the early stages had a speculative

nature of working without technical strength. After independence, government took keen

interest to regulate the speculative nature of stock exchange working. In that direction,

securities and Contract Regulation Act 1956 was passed, this gave powers to Central

Government to regulate the stock exchanges. Further to develop secondary markets in the

country, stock exchanges established at Mumbai, Chennai, Delhi, Hyderabad, Ahmedabad

and Indore. The Bangalore Stock Exchange was recognized in 1963. At present there are

23 Stock Exchanges.

Till recent past, floor trading took place in all Stock Exchanges. In the

floor trading system, the trade take place through open outcry system during the official

trading hours. Trading posts are assigned for different securities where by and sell

activities of securities took place. This system needs a face to face contact among the

traders and restricts the trading volume. The speed of the new information reflected on the

prices was rather than the investors.The Setting up of NSE and OTCEI (Over the counter exchange of India

with the screen based trading facility resulted in more and more Sock exchanges turning

towards the computer based trading. BSE introduced the screen based trading system in

1995, which known as BOLT (Bombay on line Trading. System). Madras Stock

Exchange introduced Automated Network Trading System (MANTRA) on October 7,

1996 Apart from Bombay Stock Exchanges have introduced screen based trading.

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Stock exchange is an organized market place where securities are traded. These

securities are issued by the government, semi-government bodies, public sector

undertakings and companies for borrowing funds and raising resources. Securities are

defined as any monetary claims (promissory notes or I.O.U) and also include shares,

debentures, bonds and etc. If these securities are marketable as in the case of the

government stock, they are transferable by endorsement and alike movable property. They

are tradeable on the stock exchange. So is the case shares of companies.

Under the Securities Contract Regulation Act of 1956, securities

trading is regulated by the Central Government and such trading can take place only in

stock exchanges recognized by the government under this Act. As referred to earlier there

are at present 23 such recognized stock exchanges in India. Of these, major stock

exchanges, like Bombay Stock Exchange National Stock Exchange,Inter-Connected Stock

Exchange, Culcutta, Delhi, Chennai, Hyderabad and Bangalore etc. are permanently

recognized while a few are temporarily recognized. The above act has also laid down that

trading in approved contract should be done through registered members of the exchange.

As per the rules made under the above act, trading in securities permitted to be traded

would be in the normal trading hours (10 A.M to 3.30 P.M) on working days in the trading

ring, as specified for trading purpose. Contracts approved to be traded are the following:A. Spot delivery deals are for deliveries of shares on the same day or the next day as

the payment is made.

B. Hand deliveries deals for delivering shares within a period of 7 to 14 days from the

date of contract.

C. Delivery through clearing for delivering shares with in a period of two months from

the date of the contract, which is now reduce to 15 days.(Reduced to 2 days in demat

trading)

D. Special Delivery deals for delivering of shares for specified longer periods as may

be approved by the governing board of the stock exchange.

Except in those deals meant for delivery on spot basis, all the rest are to be

put through by the registered brokers of a stock exchange. The securities contracts

(Regulation) rules of 1957 laid down the condition for such trading, the trading hours,

rules of trading, settlement of disputes, etc. as between the members and of the members

with reference to their clients.

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CHAPTER 3

INTRODUCTION TO STOCK

EXCHANGE

&COMAPANY PROFILE

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Introduction to stock exchange

Stock exchange is an organized market place where securities are traded. The government,

semi-government bodies, public sector undertakings and companies for borrowing funds

and raising resources issue these securities. Securities are defined as any monetary claims

(promissory notes or I.O.U) and also include shares, debentures, bonds and etc.

If these securities are marketable as in the case of the government stock, they are

transferable by endorsement and alike movable property. They are tradable on the stock

exchange. So is the case share of companies.

Under the Securities Contract Regulation Act of 1956, securities

trading is regulated by the Central Government and such trading can take place only in

stock exchanges recognized by the government under this Act. As referred to earlier there

are at present 23 such recognized stock exchanges in India. Of these, major stock

exchanges, like Bombay Stock Exchange National Stock Exchange,Inter-Connected Stock

Exchange, Calcutta, Delhi, Chennai, Hyderabad and Ban galore etc. are permanently

recognized while a few are temporarily recognized. The above act has also laid down that

trading in approved contract should be done through registered members of the exchange.

As per the rules made under the above act, trading in securities permitted to be traded

would be in the normal trading hours (10 A.M to 3.30 P.M) on working days in the trading

ring, as specified for trading purpose.

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FUNCTIONS OF STOCK EXCHANGE

Maintain Active Trading: Sharesare traded on the stock exchanges, enabling

the investors to buy and sell securities. The prices may vary from transaction to

transaction. A continuous trading increases the liquidity or marketability of the shares

traded on the stock exchanges.

Fixation of Prices: Price is determined by the transactions that flow from investors

demand and the suppliers preferences. Usually the traded prices are made known to the

public. This helps the investors to make the better decision.

Ensures safe and fair dealings: The rules, regulations and bylaws of the

Stock Exchanges provide a measure of safety to the investors. Transactions are conducted

under competitive conditions enabling the investors to get a fair deal.

Aids in financing the Industry: A continuous market for shares provides a

favourable climate for raising capital. The negotiability and transferability of the

securities, investors are willing to subscribe to the initial public offering (IPO). This

stimulates the capital formation.

Dissemination of Information: Stock Exchanges provide information through

their various publications. They publish the share prices traded on their basis along with

the volume traded. Directory of Corporate Information is useful for the investors

assessment regarding the corporate. Handouts, handbooks and pamphlets provide

information regarding the functioning of the Stock Exchanges.

Performance Inducer: The prices of stocks reflect the performance of the

traded companies. This makes the corporate more concerned with its public image and

tries to maintain good performance.

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Self-regulating organization: The Stock Exchanges monitor the integrity of the

members, brokers, listed companies and clients. Continuous internal audit safeguards the

investors against unfair trade practices. It settles the disputes between member brokers,

investors and brokers.

REGULATORY FRAME WORK

This Securities Contract Regulation Act, 1956 and Securities and Exchange

board of India (SEB1) Act, 1992, provides a comprehensive legal framework. A 3-tier

regulatory structure comprising the ministry of finance, SEB1 and the Governing Boards

of the Stock Exchanges regulates the functioning of Stock Exchanges.

Ministry of finance: The Stock Exchangedivision of the Ministry of Finance

has powers related to the application of the provision of the SCR Act and licensing of

dealers in the other area. According to SEBI Act, The Ministry of Finance has the appellate

and the supervisory power over the SEBI. It has powered to grant recognition to the Stock

Exchange and regulation of their operations. Ministry of Finance has the power to approve

the appointments of executives chiefs and the nominations of the public representatives in

the government Boards of the Stock Exchanges. It has the responsibility of preventing

undesirable speculation.

The Securities and Exchange Board of India

The Securities and Exchange Board of India even though established in the year

1988. Received statutory powers only on 30th January 1992. Under the SEBI Act, a wide

variety of powers are vested in the hands of SEBI. SEBI has the powers to regulate the

business of Stock Exchanges, other security and mutual funds. Registration and regulation

of market intermediaries are also carried out by SEBI. It has responsibility to prohibit the

fraudulent unfair trade practices and insider dealings. Takeovers are also monitored by the

SEBI has the multi pronged duty to promote the healthy growth of the capital market and

protect the investors.

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INTRODUCTION TO NATIONAL STOCK EXCHANGE

The National Stock Exchange (NSE) of India became operational in

the capital market segment on third November 1994 in Mumbai. The genesis of the NSE

lies in the recommendations of the pherwani committee (1991). Apart from the NSE. It had

recommended for the establishment of National Stock market System also. The committee

pointed out some major defects in the Indian stock market. The defects specified are.

1. Lack of liquidity in most of the markets in terms of depth and breadth.

2. Lack of ability to develop markets for debt.

3. Lack of infrastructure facilities and outdated trading system.

4. Lack of transparency in the operations that affect investors confidence.

5. Outdated settlement system that are inadequate to cater to the growing volume,

leading to delays.

6. Lack of single market due to the inability of various stock exchanges to

function cohesively with legal structure and regulatory framework.

These factors led to the establishment of the NSE.

The main objectives of NSE are as follows

1). To establish a nation wide trading facility for equities, debt and hybrid

instruments

2). To ensure equal access investors all over the country through

appropriate communication network.

3). To provide a fair, efficient and transparent securities market to investors

using an electronic communication network.

4). To enable shorter settlement cycle and book entry settlement system.

5). To meet current international standards of securities market.

Promoters of NSE: IDBI, ICICI, IFCI, LIC, GIC, SBI, Bank of Baroda. Canara

Bank, Corporation Bank, Indian Bank, Oriental Bank of Commerce. Union Bank of

India, Punjab National Bank, Infrastructure Leasing and Financial Services, Stock

Holding Corporation fo India and SBE capital market are the promoters of NSE.

MEMBERSHIP:

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Membership is based on factors such as capital adequacy, corporate structure,

track record, education, experience etc. Admission is a two-stage process with

applicants requiring going through a written examination followed by an interview. A

committee consisting of experienced people from the industry to assess the applicants

capability to operate as an exchange member, interviews candidates. The exchange

admits members separately to Wholesale Debt Market (WDM) segment and the capital

market segment. Only corporate members are admitted on the debt market segment

whereas individuals and firms are also eligible on the capital market segment.

Eligibility criteria for trading membership on the segment of WDM are as follows.

1). The persons eligible to become trading members are bodies corporate,

companies institutions including subsidiaries of banks engaged in financial services

and such other persons or entities as may be permitted form time to time by RBI/SEBI.

2).The whole-time directors should possess at least two years experience in any

activity related to banking or financial services or treasury.

3).The applicant must possess a minimum net worth of Rs.2 crores.

4).The applicant must be engaged solely ion the business of securities and mustnot be engaged in any fund-based activities.

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The eligibility criteria for the capital market segment is ;

1). Individuals, registered firms, bodies corporate, companies and such other persons

may be permitted under SCRA, 1957.

2). The applicant must be engaged in the business of securities and must not be

engaged in any fund-based activities.

3). The minimum net worth requirements prescribed are as follows;

a). Individual and registered firms Rs.100 Lacs.

b).Corporate bodies Rs. 100 Lacs.

.

4). The minimum prescribed qualification of graduation and two years experience of

handling securities as broker, sub-broker, authorized assistant, etc must be fulfilled by

a) Minimum two directors in case the applicant is a corporate

b). Minimum two partners in case of partnership firms and

c). The individual in case of individual or sole proprietary concerns.

The two experienced director in a corporate applicant or trading member should hold

minimum of 5% of the capital of the company.

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Present Trading Mechanism

The National system provides single, nation wide Securities. It enables

investors in one part of the country to trade at the best quotes with an investors located in

any other part of the country through the members of the stock exchanges and

subsequently clears and settles the trade in an efficient and cost effective manner.

The primary objective of the stock market is to provide clear opportunity to the investors

throughout the country to trade any securities irrespective of the size of the order or the

broker through whom the order is routed. This provides the facility to execute the buy out

any extra cost to the investors.

There will be no trading floor in the exchanges. Instead, each trading member will have a

computer at his own office any where in India which will be connected to the central

computer system at the NSE through leased lines or VSATs (Very Small Aperture

Terminal), for an interim transition period of six months and subsequently by satellite link.

VSATs are relatively smaller dishes similar to dish antenna for cable T.V and have the

benefit of not being very expensive.

A satellite network makes it possible to connect almost all the parts of the nation quicklyas it is easy to install, as against the ground lines

Such as dial up modems leased lines which are prone to disruptions, satellite links on other

hands ensure high speed, availability and quality of the connection. This code of trading is

known as On-line Trading.

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INTRODUCTION TO ISE

Inter-connected stock exchange of India limited [ISE] has been promoted by 14 Regional

stock exchanges to provide cost-effective trading linkage/connectivity to all the members

of the participating Exchanges, with the objective of widening the market for the securities

listed on these Exchanges. ISE aims to address the needs of small companies and retail

investors with the guiding principle of optimizing the existing infrastructure and

harnessing the potential of regional markets, so as to transform these into a liquid and

vibrant market through the use of state-of-the-art technology and networking.

The participating Exchanges of ISE in all about 4500 stock brokers, out of

which more than 200 have been currently registered as traders on ISE. In order to leverage

its infrastructure and to expand its nationwide reach, ISE has also appointed around 450

Dealers across 70 cities other than the participating Exchange centers. These dealers are

administratively supported through the regional offices of ISE at Delhi [north], kolkata

[east], Coimbatore, Hyderabad [south] and Nagpur [central], besides Mumbai.

ISE has also floated a wholly-owned subsidiary, ISE securities and services

limited [ISS], which has taken up corporate membership of the National Stock Exchangeof India Ltd. [NSE] in both the Capital Market and Futures and Options segments and The

Stock Exchange, Mumbai In the Equities segment, so that the traders and dealers of ISE

can access other markets in addition to the ISE markets and their local market. ISE thus

provides the investors in smaller cities a one-stop solution for cost-effective and efficient

trading and settlement in securities.

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With the objective of broad basing the range of its services, ISE has started

offering the full suite of DP facilities to its Traders, Dealers and their clients.

OBJECTIVES OF ISE:

1. Create a single integrated national level solution with access to multiple markets

for providing high cost-effective service to millions of investors across the country.

2. Create a liquid and vibrant national level market for all listed companies in general

and small capital companies in particular.

3. Optimally utilize the existing infrastructure and other resources of participating

Stock Exchanges, which are under-utilized now.

4. Provide a level playing field to small Traders and Dealers by offering an

opportunity to participate in a national markets having investment-oriented business.

5. Reduce transaction cost.

6. Provide clearing and settlement facilities to the Traders and Dealers across the

Country at their doorstep in a decentralized mode.

7. Spread demat trading across the country

SALIENT FEATURES OF ISE

Network of intermediaries:

As at the beginning of the financial year 2003-04, 548 intermediaries (207

Traders and 341 Dealers) are registered on ISE. A broad of members forms the bedrock for

any Exchange, and in this respect, ISE has a large pool of registered intermediaries who

can be tapped for any new line of business.

Robust Operational Systems:

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The trading, settlement and funds transfer operations of ISE and ISS are

completely automated and state-of-the-art systems have been deployed. The

communication network of ISE, which has connectivity with over 400 trading members

and is spread across46 cities, is also used for supporting the operations of ISS. The trading

software and settlement software, as well as the electronic funds transfer arrangement

established with HDFC Bank and ICICI Bank, gives ISE and ISS the required operational

efficiency and flexibility to not only handle the secondary market functions effectively, but

also by leveraging them for new ventures.

Skilled and experienced manpower:

ISE and ISS have experienced and professional staff, who have wide

experience in Stock Exchanges/ capital market institutions, with in some cases, the

experience going up to nearly twenty years in this industry. The staff has the skill-set

required to perform a wide range of functions, depending upon the requirements from time

to time.

Aggressive pricing policy

The philosophy of ISE is to have an aggressive pricing policy for the various

products and services offered by it. The aim is to penetrate the retail market and strengthenthe position, so that a wide variety of products and services having appeal for the retail

market can be offered using a common distribution channel. The aggressive pricing policy

also ensures that the intermediaries have sufficient financial incentives for offering these

products and services to the end-clients.

Trading, Risk Management and Settlement Software Systems:

The ORBIT (Online Regional Bourses Inter-connected Trading) and AXIS

(Automated Exchange Integrated Settlement) software developed on the Microsoft NT

platform, with consultancy assistance from Microsoft, are the most contemporary of the

trading and settlement software introduced in the country. The applications have been built

on a technology platform, which offers low cost of ownership, facilitates simple

maintenance and supports easy up gradation and enhancement. The soft wares are so

designed that the transaction processing capacity depends on the hardware used; capacity

can be added by just adding inexpensive hardware, without any additional software work.

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Vibrant Subsidiary Operations:

ISS, the wholly owned subsidiary of ISE, is one of the biggest Exchange

subsidiaries in the country. On any given day, more than 250 registered intermediaries of

ISS traded from 46 cities across the length and breadth of the country.

CHAPTER 4

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THEORETICAL

FRAMEWORK

TRADING PROCEDURE BEFORE ON-LINE

THE TRADING RING:

Trading on stock exchanges is officially done in the ring for a few hours from 11.00

A.M to 2.30P.M. Trading before or after official hour is called KERB TRADING. In the

trading ring space is provided for specified and non-specified sections. The members of

their authorized assistants have to wear a badge or carry with them identify cards given by

the exchange to enter the trading ring. They carry a Sauda book or confirmation memos

duly authorized by exchange. The stock exchanges operations at floor level are highly

technical in nature. Non-members are not permitted to enter into stock market. Hence,

various stages have to be completed in executing a transaction at a stock exchange. The

steps involved in the methods of trading have been given below:

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A.CHOICE OF BROKER:

The prospective investor who wants to buy shares or the investor who wants to sell his

shares cannot enter into hall of the exchange and transact business. They have to act

through only member brokers. They can also appoint their bankers for this purpose. Since,

bankers can become members of stock exchange as per the present regulations.

So, the first task in transacting business on stock exchanges is to choose a broker of repute

or banker. Such peoples can ensure prompt and quick execution of a transaction at the

possible price.

At present there are 4500 authorized brokers in ISE.

INTODUCTION TO ONLINE TRADING

Gone are the days of trading on the floor. Technology has changed the landscape

of the stock markets. The look of the stock exchanges has undergone metamorphic changes

in the recent years. Prior to online trading, regional stock exchange was playing a very

important role in capital markets, as they were local investors. Regional SE, which was

unable to interact with other SEs started developing this own screen based trading and

connecting to other scrips which were not available with them. This also helped in

accessing the quotes and other market information from other stock exchange which

proved vital in the functioning of the system as a whole.

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The trading network is depicted in given below NSE has main computer which

is connected through Very Small Aperture Terminal (VSAT) installed at its office. The

main computer runs on a fault tolerant STRATUS mainframe computer at the Exchange.

Brokers have terminals (identified as the PCs in the given picture) installed at their

premises which are connected through VSATs/ leased lines/modems. An investor informs

a broker to place an order on his behalf. The broker enters the order through his PC, which

runs under Windows NT and sends signal to the satellite via VSAT/leased line/modem.

The signal is directed to mainframe computer at NSE via VSAT at NSEs office. A

message relating to the order activity is broadcast to the respective member. The order

confirmation message is immediately displayed on the PC of the broker. This order

matches with the existing passive order(S) otherwise it waits for the active orders to enter

the system. On order matching, a message is broadcast to the respective member.

TRADING NETWORK

HUB

ANTENNA

SATELITE

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NSE MAINFRAME BROKERS PREMISES

CORPORATE HIERARCHY

The Trading member has the facility of defining a hierarchy amongst its users of the

NEAT system. The hierarchy comprises:

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Corporate Manager

Branch 1 Branch 2


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The users of the trading system can logon as either of the user type. The

significance of each type is explained below:

A. Corporate Manager: The corporate manager is a term assigned to a user placed at the

highest level in a trading firm. The facility to set Branch order value limits and user order

value limits is available to the corporate manager.

B. Branch Manager: The branch manager is term assigned to a user who is placed under

the corporate manager. The branch manager can set user order value limits for each of his

branch.

B. Dealer: Dealers are users at the lower most level of the hierarchy. A dealer can view

and perform order and related activities only for oneself.

Easier transaction processing.

Profit in time: Investor can make profits by selling shares when the going is good. They do

not have to instruct their brokers on the cut off price to sell shares.Ease and transparency: Since the broking, bank and demat account are all electronically

connected, all transaction get updated, demat account shows the latest stockholding

statement while the bank account shows the balance amount after buying or selling of

shares.

Precaution: Check for hidden costs of brokers age. Beware of net seamstress. Never

double click the mouse during execution of trade avoids cyber cafes and change password

regularly.

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Less fees: shares traded online require no human intervention to match buys and sells. This

means that commission costs are cut dramatically for the frequent investor.

CLEARING & SETTLEMENT TRADING MECHANISM

The clearing and settlement mechanism in India securities market has witnessed

several innovations during the last decade. These include use of the state-of-art information

technology, compression of settlement cycle, dematerialization and electronic transfer of

securities, securities lending and borrowing, professionalisation of trading members, fine-

tuned risk management system, emergence of clearing corporation to assume counterparty

risk etc., though many these are yet to permeate the whole market.Till recently, the stock exchanges in India were following a system of account period

settlement for cash market transactions, expert for transaction in a few active securities,

which were settled under t+3 rolling settlement. The rolling settlement has been introduced

for all securities. With effect from April 1, 2003 T+2 rolling settlement has been

introduced. The stock exchange were also offering deferral products to provide leverage to

members to postpone their settlement obligations. The transaction are not settled

immediately but after 2 days after the trade day. The members receive the funds/securities

in accordance with the pay-in/pay-out schedules notified by the respective exchanges.

Given the growing volume of trades and market volatility, the time gap between trading

and settlement gives rise to settlement risk. In recognition of this, the exchanges and their

clearing corporation employ risk management practices to ensure timely settlement of

trades. The regulators have also prescribed elaborate margining and capital adequacy

standards to secure market integrity and protect the interests of investors. The exchanges

not providing counter-party guarantee have been advised by SEBI to set up trade guarantee

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funds, which would honour pay-in liabilities in the event of default by a member. In

pursuance to this, 16 out of 23 exchanges have set up trade/settlement guarantee funds.

The trades are settled irrespective of default by a member and the exchange follows up the

defaulting member subsequently for recovery of his dues to the exchange. The market has

full confidence that settlements will take place in time and will be completed irrespective

of possible default by isolated trading members.

Movement of securities has become almost instantaneous in the dematerialized

environment. Two depositories viz., National Securities Depositories Ltd. (NSDL) and

Central Depositories Services Ltd. (CDSL) provide electronic transfer securities and more

then 99% of turnover is settled in dematerialized form. All actively traded scrips are held,

traded and settled in demat form. The obligations of members are downloaded to

members/custodians by the clearing agency. The members/custodians make available the

required securities in their pool accounts with Depository Participants (DPs) by the

prescribed pay-in time for securities. The depository transfers the securities from the pool

accounts of members/custodians to the settlement account of the clearing agency. As per

the schedule determined by the depository from the settlement account of the clearing

agency to the pool accounts of members/custodians. The pay-in and pay-out of securities isaffected on the same day for all settlements.

CHAPTER 5

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RISK MANAGEMENTPRACTICES

Risk Management in NSE

Margins

Margins collection from Client

Margin Shortfall

Liquid assets

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Exemption for institutional deals

Exemption upon delivery of securities

Margins

Categorization of stocks for imposition of margins

The Stocks which have traded at least 80% of the days for the previous six

months shall constitute the Group I and Group II.

Out of the scrips identified above, the scrips having mean impact cost of

less than or equal to 1% shall be categorized under Group I and the scrips

where the impact cost is more than 1, shall be categorized under Group II.

The remaining stocks shall be classified into Group III.

The impact cost shall be calculated on the 15th of each month on a rolling

basis considering the order book snapshots of the previous six months. On

the basis of the impact cost so calculated, the scrips shall move from one

group to another group from the 1st of the next month.

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.

Categorisation of newly listed securities

For the first month and till the time of monthly review 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

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In case of securities in Trade for Trade segment (TFT segment) VaR as applicable to

Group 3 (illiquid securities) shall be applicable

VaR margin rate for a security constitutes the following:

1. Value at Risk (VaR) based margin, which is arrived at, based on the methods

stated above. The index VaR, for the purpose, would be the higher of the

daily Index VaR based on S&P CNX NIFTY or BSE SENSEX. The index

VaR would be subject to a minimum of 5%.

2. Security specific Margin: NSCCL may stipulate security specific margins for

the securities from time to time.

The VaR margin rate computed as mentioned above will be charged on the net

outstanding position (buy value-sell value) of the respective clients on the respective

securities across all open settlements. There would be no netting off of positions

across different settlements. The net position at a client level for a member are

arrived at and thereafter, it is grossed across all the clients including proprietary

position to arrive at the gross open position.

For example, in case of a member, if client A has a buy position of 1000 in a security

and client B has a sell position of 1000 in the same security, the net position of the

member in the security would be taken as 2000. The buy position of client A and sell

position of client B in the same security would not be netted. It would be summed up

to arrive at the members open position for the purpose of margin calculation.

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.

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

settlement.

The details of all margins (VAR, extreme loss margin and mark to market) as at end

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of each day will be downloaded to members in their respective Extranet directory.

Extreme Loss Margin

The Extreme Loss Margin for any security shall be higher of:

1. 5%, or

2. 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.

The Extreme Loss Margin shall be collected/ adjusted against the total liquid assets

of the member on a real time basis.

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.

There would be no netting off of positions across different settlements. The Extreme

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

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.

Mark-to-Market Margin

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

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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.

The mark to market margin (MTM) shall be collected from the member before the

start of the trading of the next day.

The MTM margin shall also be collected/adjusted from/against the cash/cash

equivalent component of the liquid net worth deposited with the Exchange.

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.

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.

In case of Trade for Trade Segment (TFT segment) each trade shall be marked to

market based on the closing price of that security.

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

settlement.

Margins collection from 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

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Stock Exchanges. However, the quantum of these margins and the form and mode of

collection are left to the discretion of the members.

Margin Shortfall

In case of any shortfall in margin:

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

Penalty for margin violation

Penalty applicable for margin violation shall be levied on a monthly basis based on

slabs as mentioned below:

Instances of

Disablement Penalty to be levied

1st instance 0.07% per day

2nd to 5th instance

of disablement0.07% per day +Rs.5000/- per instance from 2nd to 5th instance

6th to 10th

instance of

disablement

0.07% per day+ Rs. 20000 ( for 2nd to 5th instance) +Rs.10000/-

per instance from 6th to 10th instance

11th instance

onwards

0.07% per day +Rs. 70,000/- (for 2nd to 10th instance)+Rs.10000/- per instance from 11th instance onwards.

Additionally, the member will be referred to the Disciplinary

Action Committee for suitable action

Instances as mentioned above shall refer to all disablements during market hours in a

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calendar month. The penal charge of 0.07% per day shall be applicable on all

disablements due to margin violation anytime during the day.

Liquid assets

Members are required to provide liquid assets which adequately cover various

margins & base minimum capital requirements. Liquid assets of the member include

their Initial membership deposits including the security deposits. Members may

provide additional collateral deposit towards liquid assets, over and above their

minimum membership deposit requirements

The acceptable forms of capital towards liquid assets and the applicable haircuts are

listed below:

1. Cash Equivalents:

a. Cash

b. Bank fixed deposits (FDRs) issued by approved banks and

deposited with approved Custodians or NSCCL

c. Bank Guarantees (BGs) in favour of NSCCL from

approved banks in the specified format.

d. Government Securities. The procedure for acceptance and

list of securities is as specified in circular. Applicablehaircut is 10%.

e. Units of liquid mutual funds or government securities

mutual funds as decided by NSCCL from time to time.

Applicable haircut is 10%.

2. Other Liquid assets:

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a. Liquid (Group I) Equity Sharesin demat form, as specified by NSCCL

from time to time deposited with approved Custodians. Haircuts applied are

equivalent to the VaR margin for the respective securities.

b. Mutual fund units other than those listed under cash equivalents decided

by NSCCL from time to time. Haircut equivalent to 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.

Exemption for institutional deals

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)

1 Institutional Transactions:

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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 Non-Custodial Institutional deals (NCIT) and contraction of

unallocated OTRs.

Reporting and other procedures regarding NCIT and Institution transactions

shall continue as per the current procedure.


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

Other Liquid assets:

a. Liquid (Group I) Equity Shares in demat form, as specified by NSCCL from

time to time deposited with approved Custodians. Haircuts applied are

equivalent to the VaR margin for the respective securities.

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Mutual fund units other than those listed under cash equivalents decided by NSCCL

from time to time. Haircut equivalent to 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 securiExemption for institutional deals

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)

2 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

members 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.

b. ty.


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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

Minimum Base Capital

A Clearing Member (CM) is required to meet with the Base Minimum Capital

(BMC) requirements prescribed by NSCCL before activation. The CM has also to

ensure that BMC is maintained in accordance with the requirements of NSCCL at all

points of time, after activation.

Every CM is required to maintain BMC of Rs.50 lakhs with NSCCL in the following

manner:

(1) Rs.25 lakhs in the form of cash.

(2) Rs.25 lakhs in any one form or combination of the below forms:

i. Cash

ii. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with

approved Custodians or NSCCL

iii. Bank Guarantee in favour of NSCCL from approved banks in the specified

format.

iv. Approved securities in demat form deposited with approved Custodians.

In addition to the above MBC requirements, every CM is required to maintain BMC

of Rs.10 lakhs, in respect of every trading member(TM) whose deals such CM

undertakes to clear and settle, in the following manner:

(1) Rs.2 lakhs in the form of cash.

(2) Rs.8 lakhs in a one form or combination of the following:

i. Cash

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ii. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with

approved Custodians or NSCCL


format.

iv. Approved securities in demat form deposited with approved Custodians.

Any failure on the part of a CM to meet with the BMC requirements at any point of

time, will be treated as a violation of the Rules, Bye-Laws and Regulations of

NSCCL and would attract disciplinary action inter-alia including, withdrawal of

trading facility and/ore clearing facility, closing out of outstanding positions etc.

Additional Base Capital

Clearing members may provide additional margin/collateral deposit (additional base

capital) to NSCCL and/or may wish to retain deposits and/or such amounts which

are receivable from NSCCL, over and above their minimum deposit requirements,

towards initial margin and/ or other obligations.

Clearing members may submit such deposits in any one form or combination of the

following forms:

i. Cash

ii. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited

with approved Custodians or NSCCL


format.

iv. Approved securities in demat form deposited with approved Custodians

Effective Deposits / Liquid Networth

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Effective deposits

All collateral deposits made by CMs are segregated into cash component and non-

cash component.

For Additional Base Capital, cash component means cash, bank guarantee, fixed

deposit receipts, T-bills and dated government securities. Non-cash component shall

mean all other forms of collateral deposits like deposit of approved demat securities.

At least 50% of the Effective Deposits should be in the form of cash.

Liquid Networth

Liquid Networth is computed by reducing the initial margin payable at any point in

time from the effective deposits.

The Liquid Networth maintained by CMs at any point in time should not be less thanRs.50 lakhs (referred to as Minimum Liquid Net Worth).

Margins

NSCCL has developed a comprehensive risk containment mechanism for the Futures

& Options segment. The most critical component of a risk containment mechanism

for NSCCL is the online position monitoring and margining system. The actual

margining and position monitoring is done on-line, on an intra-day basis. NSCCL

uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of

margining, which is a portfolio based system

Initial Margin

NSCCL collects initial margin up-front for all the open positions of a CM based on

the margins computed byNSCCL-SPAN. A CM is in turn required to collect the

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initial margin from the TMs and his respective clients. Similarly, a TM should

collect upfront margins from his clients.

Initial margin requirements are based on 99% value at risk over a one day time

horizon. However, in the case of futures contracts (on index or individual securities),

where it may not be possible to collect mark to market settlement value, before the

commencement of trading on the next day, the initial margin may be computed over

a two-day time horizon, applying the appropriate statistical formula. The

methodology for computation of Value at Risk percentage is as per the

recommendations of SEBI from time to time.

Initial margin requirement for a member:

a. For client positions - shall be netted at the level of individual client and

grossed across all clients, at the Trading/ Clearing Member level, without any

setoffs between clients.

b. For proprietory positions - shall be netted at Trading/ Clearing Member level

without any setoffs between client and proprietory positions.

For the purpose of SPAN Margin, variousparameters are specified from time to

time.

In case a trading member wishes to take additional trading positions his CM is

required to provide Additional Base Capital (ABC) to NSCCL. ABC can be

provided by the members in the form ofCash, Bank Guarantee,Fixed Deposit

Receipts and approved securities.

Premium Margin

In addition to Initial Margin, Premium Margin would be charged to members. The

premium margin is the client wise margin amount payable for the day and will be

required to be paid by the buyer till the premium settlement is complete.

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Because SPAN is used to determine performance bond requirements (margin

requirements), its overriding objective is to determine the largest loss that a portfolio

might reasonably be expected to suffer from one day to the next day.

In standard pricing models, three factors most directly affect the value of an option at

a given point in time:

1. Underlying market price

2. Volatility (variability) of underlying instrument

3. Time to expiration

As these factors change, so too will the value of futures and options maintained

within a portfolio. SPAN constructs scenarios of probable changes in underlying

prices and volatilities in order to identify the largest loss a portfolio might suffer

from one day to the next. It then sets the margin requirement at a level sufficient to

cover this one-day loss.

Mechanics of SPAN

Risk Arrays

Composite Delta

Calendar Spread or Intra-commodity or Inter-month Risk Charge

Short Option Minimum Charge

Net Buy Premium (only for option contracts)

Computation of Initial Margin - Overall Portfolio Margin Requirement

Black-Scholes Option Price calculation model

Mechanics of SPAN

The complex calculations (e.g. the pricing of options) in SPAN are executed by the

Clearing Corporation. The results of these calculations are called Risk arrays. Risk

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arrays, and other necessary data inputs for margin calculation are then provided to

members in a file called the SPAN Risk Parameter file. This file will be provided to

members on a daily basis.

Members can apply the data contained in the Risk parameter files, to their specific

portfolios of futures and options contracts, to determine their SPAN margin

requirements.

Hence members need not execute complex option pricing calculations, which would

be performed by NSCCL. SPAN has the ability to estimate risk for combined futures

and options portfolios, and re-value the same under various scenarios of changing

market conditions.

Risk Arrays

The SPAN risk array represents how a specific derivative instrument (for

example, an option on NIFTY index at a specific strike price) will gain or lose value,

from the current point in time to a specific point in time in the near future (typically

it calculates risk over a one day period called the look ahead time), for a specific

set of market conditions which may occur over this time duration.The specific set of

market conditions evaluated, are called the risk scenarios, and these are defined in

terms of :

(a) how much the price of the underlying instrument is expected to change over one

trading day, and

(b) how much the volatility of that underlying price is expected to change over one

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trading day.

The results of the calculation for each risk scenario i.e. the amount by which the

futures and options contracts will gain or lose value over the look-ahead time under

that risk scenario - is called the risk array value for that scenario. The set of risk

array values for each futures and options contract under the full set of risk scenarios

constitutes the Risk Array for that contract.

In the Risk Array, losses are represented as positive values, and gains as negative

values. Risk array values are typically represented in the currency (Indian Rupees) in

which the futures or options contract is denominated.

SPAN further uses a standardized definition of the risk scenarios, defined in terms of

(i) the underlying price scan range or probable price change over a one day period,

(ii) and the underlying price volatility scan range or probable volatility change of

the underlying over a one day period.These two values are often simply referred to as the price scan range and the

volatility scan range. There are sixteen risk scenarios in the standard definition.

These scenarios are listed as under:

1. Underlying unchanged; volatility up

2. Underlying unchanged; volatility down

3. Underlying up by 1/3 of price scanning range; volatility up

4. Underlying up by 1/3 of price scanning range; volatility down

5. Underlying down by 1/3 of price scanning range; volatility up

6. Underlying down by 1/3 of price scanning range; volatility down





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15. Underlying up extreme move, double the price scanning range (cover 35% of

loss)

16. Underlying down extreme move, double the price scanning range (cover 35% of

loss)

SPAN uses the risk arrays to scan probable underlying market price changes and

probable volatility changes for all contracts in a portfolio, in order to determine

value gains and losses at the portfolio level. This is the single most important

calculation executed by the system.

As shown above in the sixteen standard risk scenarios, SPAN starts at the last

underlying market settlement price and scans up and down three even intervals of

price changes (price scan range).

At each price scan point, the program also scans up and down a range of probable

volatility from the underlying market's current volatility (volatility scan range).

SPAN calculates the probable premium value at each price scan point for volatility

up and volatility down scenario. It then compares this probable premium value to the

theoretical premium value (based on last closing value of the underlying) to

determine profit or loss.

Deep-out-of-the-money short options positions pose a special risk identification

problem. As they move towards expiration, they may not be significantly exposed to

"normal" price moves in the underlying. However, unusually large underlying price

changes may cause these options to move into-the-money, thus creating large losses

to the holders of short option positions. In order to account for this possibility, two of

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the standard risk scenarios in the Risk Array (sr. no. 15 and 16) reflect an "extreme"

underlying price movement, currently defined as double the maximum price scan

range for a given underlying. However, because price changes of these magnitudes

are rare, the system only covers 35% of the resulting losses.

After SPAN has scanned the 16 different scenarios of underlying market price and

volatility changes, it selects the largest loss from among these 16 observations. This

"largest reasonable loss" is the Scanning Risk Charge for the portfolio - in other

words, for all futures and options contracts.

Composite Delta

SPAN uses delta information to form spreads between futures and options contracts.

Delta values measure the manner in which a future's or option's value will change in

relation to changes in the value of the underlying instrument. Futures deltas are

always 1.0; options deltas range from -1.0 to +1.0. Moreover, options deltas are

dynamic: a change in value of the underlying instrument will affect not only the

option's price, but also its delta.

In the interest of simplicity, SPAN employs only one delta value per contract, called

the "Composite Delta." It is the weighted average of the deltas associated with each

underlying price scan point. The weights associated with each price scan point

are based upon the probability of the associated price movement, with more likely

price changes receiving higher weights and less likely price changes receiving lower

weights. Please note that Composite Delta for an options contract is an estimate of

the contract's delta after the lookahead - in other words, after one trading day has

passed.

Calendar Spread or Intra-commodity or Inter-month Risk Charge

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As SPAN scans futures prices within a single underlying instrument, it assumes

that price moves correlate perfectly across contract months. Since price moves across

contract months do not generally exhibit perfect correlation, SPAN adds an Calendar

Spread Charge (also called the Inter-month Spread Charge) to the Scanning Risk

Charge associated with each futures and options contract. To put it in a different

way, the Calendar Spread Charge covers the calendar (inter-month etc.) basis risk

that may exist for portfolios containing futures and options with different

expirations.

For each futures and options contract, SPAN identifies the delta associated each

futures and option position, for a contract month. It then forms spreads using these

deltas across contract months. For each spread formed, SPAN assesses a specific

charge per spread which constitutes the Calendar Spread Charge.

The margin for calendar spread shall be calculated on the basis of delta of the

portfolio in each month. Thus a portfolio consisting of a near month option with a

delta of 100 and a far month option with a delta of 100 would bear a spread chargeequivalent to the calendar spread charge for a portfolio which is long 100 near month

futures contract and short 100 far month futures contract.

A calendar spread would be treated as a naked position in the far month contract

three trading days before the near month contract expires.

Short Option Minimum Charge

Short options positions in extremely deep-out-of-the-money strikes may appear to

have little or no risk across the entire scanning range. However, in the event that

underlying market conditions change sufficiently, these options may move into-the-

money, thereby generating large losses for the short positions in these options. To

cover the risks associated with deep-out-of-the-money short options positions, SPAN

assesses a minimum margin for each short option position in the portfolio called the

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Short Option Minimum charge, which is set by the NSCCL. The Short Option

Minimum charge serves as a minimum charge towards margin requirements for each

short position in an option contract.

For example, suppose that the Short Option Minimum charge is Rs. 50 per short

position. A portfolio containing 20 short options will have a margin requirement of

at least Rs. 1,000, even if the scanning risk charge plus the inter month spread charge

on the position is only Rs. 500.

Net Buy Premium (only for option contracts)

In the above scenario only sell positions are margined and offsetting benefits for buy

positions are given to the extent of long positions in the portfolio by computing the

net option value.

To cover the one day risk on long option positions (for which premium shall be

payable on T+1 day), net buy premium to the extent of the net long options position

value is deducted from the Liquid Networth of the member on a real time basis. Thiswould be applicable only for trades done on a given day. The Net Buy Premium

margin shall be released towards the Liquid Networth of the member on T+1 day

after the completion of pay-in towards premium settlement.

Computation of Initial Margin - Overall Portfolio Margin Requirement

The total margin requirements for a member for a portfolio of futures and options

contract would be computed as follows:

(i) SPAN will add up the Scanning Risk Charges and the Intracommodity Spread

Charges.

(ii) SPAN will compares this figure (as per i above) to the Short Option Minimum

charge

(iii) It will select the larger of the two values between (i) and (ii)

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(iv) Total SPAN Margin requirement is equal to SPAN Risk Requirement (as per iii

above), less the net option value, which is mark to market value of difference in

long option positions and short option positions.

(v) Initial Margin requirement = Total SPAN Margin Requirement + Net Buy

Premium

Black-Scholes Option Price calculation model

The options price for a Call, computed as per the following Black Scholes formula:

C = S * N (d1) - X * e- rt * N (d2)

and the price for a Put is : P = X * e- rt * N (-d2) - S * N (-d1)

where :

d1 = [ln (S / X) + (r + 2 / 2) * t] / * sqrt(t)d2 = [ln (S / X) + (r - 2 / 2) * t] / * sqrt(t)

= d1 - * sqrt(t)

C = price of a call option

P = price of a put option

S = price of the underlying asset

X = Strike price of the option

r = rate of interest

t = time to expiration

= volatility of the underlying

N represents a standard normal distribution with mean = 0 and standard deviation =

1

ln represents the natural logarithm of a number. Natural logarithms are based on the

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constant e (2.71828182845904).

Rate of interest may be the relevant MIBOR rate or such other rate as may be

specified.

SPAN is a registered trademark of the Chicago Mercantile Exchange, used herein

under License. The Chicago Mercantile Exchange assumes no liability in connection

with the use of SPAN by any person or entity.

Payment of Margins

The initial margin is payable upfront by Clearing Members. Initial margins can be

paid by members in the form ofCash, Bank Guarantee, Fixed Deposit Receipts and

approved securities.

Non-fulfillment of either the whole or part of the margin obligations will be treated

as a violation of the Rules, Bye-Laws and Regulations of NSCCL and will attract

penal charges @ 0.07% per day of the amount not paid throughout the period of non-

payment. In addition NSCCL may at its discretion and without any further notice to

the clearing member, initiate other displinary action, inter-alia including, withdrawal

of trading facilities and/ or clearing facility, close out of outstanding positions,

imposing penalties, collecting appropriate deposits, invoking bank guarantees/ fixed

deposit receipts, etc.

Violations

PRISM (Parallel Risk Management System) is the real-time position monitoring and

risk management system for the Futures and Options market segment at NSCCL.

The risk of each trading and clearing member is monitored on a real-time basis and

alerts/disablement messages are generated if the member crosses the set limits.

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Initial Margin Violation

Exposure Limit Violation

Trading Member wise Position Limit Violation

Client Level Position Limit Violation

Market Wide Position Limit Violation

Violation arising out of misutilisation of trading member/ constituent

collaterals and/or deposits

Violation of Exercised Positions

Clearing members, who have violated any requirement and / or limits, may submit a

written request to NSCCL to either reduce their open position or, bring in additional

cash deposit by way of cash or bank guarantee or FDR or securities.

A penalty of Rs. 5000/- is levied for each violation and is debited to the clearing

account of clearing member on the next business day. In respect of violation on more

than one occasion on the same day, penalty in case of second and subsequent

violation during the day will be increased by Rs.5000/- for each such instance. (For

example in case of second violation for the day the penalty leviable will be

Rs.10000/-, Rs.15000 for third instance and so on). The penalty is charged to the

clearing member irrespective of whether the clearing member brings in margin

deposits subsequently.

Where the penalty levied on a clearing member/ trading member relates to a

violation of Client-wise Position Limit, the clearing member/ trading member may in

turn, recover such amount of penalty from the concerned clients who committed the

violation

Market Wide Position Limits for derivative contracts on underlying stocks

At the end of each day the Exchange shall test whether the market wide open interest

for any scrip exceeds 95% of the market wide position limit for that scrip. If so, the

Exchange shall take note of open position of all client/ TMs as at the end of that day

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in that scrip, and from next day onwards the client/ TMs shall trade only to decrease

their positions through offsetting positions till the normal trading in the scrip is

resumed.

The normal trading in the scrip shall be resumed only after the open outstanding

position comes down to 80% or below of the market wide position limit.

A facility is available on the trading system to display an alert once the open interest

in the futures and options contract in a security exceeds 60% of the market wide

position limits specified for such security. Such alerts are presently displayed at time

intervals of 10 minutes.

At the end of each day during which the ban on fresh positions is in force for any

scrip, when any member or client has increased his existing positions or has created

a new position in that scrip the client/ TMs shall be subject to a penalty of 1% of the

value of increased position subject to a minimum of Rs.5000 and maximum of Rs.1,

00,000. The positions, for this purpose, will be valued at the underlying close price.

The penalty shall be recovered from the clearing member affiliated with such trading

members/clients on a T+1 day basis along with pay-in. The amount of penalty shall

be informed to the clearing member at the end of the day.

Price Scan Range

To compute worst scenario loss on a portfolio, the price scan range for option on

individual securities and futures on individual securities would also be linked to liquidity,

measured in terms of impact cost for an order size of Rs 5 lakh calculated on the basis of

order book snapshots in the previous six months. Accordingly if the mean value of the

impact cost exceeds 1%, the price scanning range would be scaled up by square root of

three. This would be in addition to the requirement on account of look ahead period as

may be applicable.

The mean impact cost as stipulated by SEBI is calculated on the 15th of each month on a

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rolling basis considering the order book snap shots of previous six months. If the mean

impact cost of a security moves from less than or equal to 1% to more than 1%, the

price scan range in such underlying shall be scaled by square root of three and scaling

shall be dropped when the impact cost drops to 1% or less. Such changes shall be

applicable on all existing open position from the third working day from the 15th of each

month. The detail ofimpact coston the list of underlyings on which derivative contracts

are available and themethodology of computation of the same are available at our

website.

Position Limits

Clearing Members are subject to the following exposure / position limits in addition

to initial margins requirements

Exposure Limits Client Margin Reporting

Clearing Members (CMs) and Trading Members (TMs) are required to collect

upfront initial margins from all their Trading Members/ Constituents.

CMs are required to compulsorily report, on a daily basis, details in respect of such

margin amount due and collected, from the TMs/ Constituents clearing and settling

through them, with respect to the trades executed/ open positions of the TMs/

Constituents, which the CMs have paid to NSCCL, for the purpose of meeting

margin requirements.

Similarly, TMs are required to report on a daily basis details in respect of such

margin amount due and collected from the constituents clearing and settling through

them, with respect to the trades executed/ open positions of the constituents, which

the trading members have paid to the CMs, and on which the CMs have allowed

initial margin limit to the TMs.

CMs/ TMs are required to report details of initial margins collected from their TMs/

Constituents by uploadin

risk manage men at of mahheelasst

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