Risk containment in the Rolling settlement
Summary
SEBI mandates the introduction of a 99% Value at Risk (VaR) based margin system for scrips in compulsory rolling settlement effective July 2, 2001. The circular requires stock exchanges to implement direct debits for margin payments and extend gross margin calculations across the entire cash market by September 3, 2001. Exchanges are advised to strengthen surveillance mechanisms and may impose additional margins to contain market risks.
Text
For the scrips in the compulsory rolling settlement, the 99% VaR based margin system would be introduced with effect from July 02, 2001... exchanges will calculate scrip wise VaR and index based VaR as indicated below and apply the higher of the two as the margin percentage
Scrip wise daily volatility calculated using the same exponentially weighted moving average methodology that is used in the index futures market and the scrip wise daily VaR will be calculated as 3.5 times the volatility so calculated.
The multiplier factor for each of these stocks will be calculated on the first trading day of every calendar month based on average stock volatility during previous six months on a rolling basis. The higher of Sensex and Nifty VaR will be used. The multiplier shall not in any case be less than 1.75.
For the 148 (163-15) scrips already in the compulsory rolling settlement the margin will be 3 times the daily index VaR.
The minimum daily index VaR shall be 5% as in the index futures market at present. The higher of Sensex and Nifty VaR will be used.
Therefore, additional 12% margin would be imposed to address 1% of the cases.
The VaR calculations will be based either on BSE Sensex or S & P CNX Nifty and would be disseminated by the BSE and NSE daily on .their websites by 6:30 pm in a downloadable format.
The VaR based margin would be capped at 100%
The VaR based margin calculated by an exchange at the end of the day would be used for the purpose of margin calculations for the transactions carried out next day.
The VaR based margin would be collected on T+1 basis.
In addition to the margin calculated on the VaR basis, exchanges shall continue to collect mark-to-market margin.
The VaR based margin is basically replacing the present margin structure except the mark-to-market margin. This does not make any change in the present capital adequacy and exposure limits etc.
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Source: SecMarx — Risk containment in the Rolling settlement. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.