Rationalisation of the existing Margin System

SMDRP/POLICY/CIR-19/99 · 1999-07-02 · SEBI Secondary Market Department

Summary

SEBI mandates the rationalization of margin systems for stock exchanges, introducing specific rules for Mark-to-Market and Volatility margins. Concentration Margin and 90-day Special Margin are discontinued, while Base Capital requirements and Incremental Carry Forward margins are updated. Exchanges must implement these changes by the first settlement after July 31, 1999.

Text

Mark to Market Margin is to be calculated by marking each transaction in a scrip to the closing price of the scrip at the end of trading. For the trading cycle in progress, the Mark to Market values for scrips showing losses are to be taken into account and Mark to Market values for scrips showing profits are not to be taken into account.

After close of a trading cycle, Mark to Market margin would continue to be computed in respect of transactions of the closed trading cycle till its funds pay-in day. However, for Mark to Market margin for the closed cycle computed during this period, Mark to Market losses in a scrip may be netted against Mark to Market profits in other scrips.

It is clarified that margins shall be calculated separately for the two trading cycles. Credit for Mark to Market profits of the closed trading cycle may not be given against Mark to Market losses of the current trading cycle.

Transactions of sales for delivery would be exempt from payment of Mark to Market margin, subject to the condition that exemption shall be given only after the delivery is submitted to the Clearing House/ Clearing Corp. of the exchange and NOT on the basis of mere declaration that the sale is for delivery.

Exemption is to be given only to the extent of loss incurred on the sale position, for which delivery has been given and NOT to the extent of value of shares delivered.

In case delivery is given at a date later than when the margin payment is due, margin would first be collected in full, and credit for the margin amount would be given on deposit of delivery. However, margin once collected will not be refunded before the pay-out day.

Margins due should be collected by the exchanges on T+1 basis.

The margin is to be collected in the form of cash/ Bank Guarantee (BG)/ FDR only.

The margin collected for a trading cycle is to be released in the pay-in of the corresponding settlement.

Volatility margin was prescribed in June 1998 to curb excessive volatility in the market and to act as a deterrent to building of excessive outstanding positions. With the objective of addressing volatility over short term as well as a longer period of 6 weeks, volatility will be computed on a rolling basis over a period of preceding 6 weeks.

Volatility percentage = { (6 week high – 6 week low)/ 6 week low} * 100%

Volatility margins would be imposed as follows: 40% and above but less than 50% - 5%; 50% and above but less than 70% - 10%; 70% and above but less than 90% - 15%; 90% and above - 20%.

Source: SecMarx — Rationalisation of the existing Margin System. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.