Comprehensive Risk Management Framework for the cash market
Summary
This circular mandates the implementation of a comprehensive risk management framework for the cash market by all stock exchanges effective May 18, 2005. It requires exchanges to align their systems with the provisions in Annexures I and II, which detail margin requirements and liquid asset definitions. The directive is issued under Section 11(1) of the SEBI Act to protect investors and regulate the securities market. This section defines the methodology for calculating mean impact cost and establishes a monthly review process for reclassifying securities based on liquidity metrics. It details the computation of Value at Risk (VaR) margins, Mark to Market losses, and Extreme Loss Margins for different stock groups. Finally, it outlines specific exemptions from margin requirements for institutional investors and procedures for handling margin shortfalls. This section details the consequences of pay-in shortfalls, including withdrawal of trading facilities and withholding of securities payouts. It establishes Base Minimum Capital (BMC) requirements for various stock exchanges and outlines conditions for refunding excess capital or re-enhancing it based on turnover. The text further m
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The Stock Exchanges shall put in place the necessary systems to ensure the operationalization of the comprehensive risk management framework with effect from May 18, 2005 and that they have tested the software and removed any glitches in its operation well before the above mentioned date to avoid any problems in the live environment.
The Stock Exchanges, are, therefore advised to strengthen their monitoring and surveillance systems and take such timely actions as and when necessary.
ensure that their risk management framework is in line with the provisions contained in the annexure and take steps to make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision immediately.
bring the provisions of this circular to the notice of the member brokers/clearing members of the Exchange and also to disseminate the same on the website.
communicate to SEBI, the status of the implementation of the provisions of this circular in Section II, item no. 13 of the Monthly Development Report.
This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
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...
The acceptable liquid assets and the applicable haircuts are listed below: Cash Equivalents (Cash, Bank fixed deposits, Bank guarantees, Securities of the Central Government, Units of liquid mutual funds)... Other Liquid Assets (Liquid Equity Shares, Mutual fund units, Card value of eligible exchanges).
The valuation of the liquid assets shall be done on a daily basis except for the card value which shall be taken on the basis of the last sale or auction.
Not more than 5% of the TGF/SGF or 1% of the total liquid assets deposited with the exchange, whichever is lower, shall be exposed to any single bank which has a net worth of less than Rs 500 Crores... and not more than 50% of the TGF/SGF or 10% of the total liquid assets deposited with the exchanges, whichever is lower, shall be exposed to all such banks put together.
Mark to market losses shall be paid by the member in the form of cash or cash equivalents.
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.
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Source: SecMarx — Comprehensive Risk Management Framework for the cash market. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.