Risk Containment Measures for the Index Futures Market
Summary
This section outlines the risk containment measures for the index futures market approved by SEBI based on the Prof. J R Varma Group report. It mandates that initial margins be computed using a 99% Value at Risk model with specific exponential moving average formulas. Additionally, it establishes rules for calendar spread margins and the enforcement of margin collection procedures. This section defines the calculation of liquid net worth and mandates that clearing members satisfy specific minimum liquidity and exposure limits in real time. It establishes exposure caps for bank guarantees and acceptable securities, including haircuts and marking-to-market requirements. Additionally, it outlines position limits at customer, trading member, and market levels, alongside reporting obligations for risk estimation failures. This section details the calculation of margins and exposures for a member holding a 300-contract spread position with specific futures prices. It demonstrates that the total initial margin is derived from both the open position and the spread components based on days to expiry. Finally, it verifies that the member's liquid net worth satisfies two specific conditions o
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The initial margin would be computed based on 99% Value at Risk (VAR). The exponential moving average method would be used to obtain the volatility estimate every day.
l is a parameter which determines how rapidly volatility estimates changes. The value of l is fixed at 0.94.
The percentage margin on short positions would be equal to 100(exp(3st )-1) and the percentage margin on long positions would be equal to 100(1-exp(-3st )).
The volatility estimation and margin fixation methodology should be clearly made known to all market participants... Further, the trading software itself should provide this information on a real time basis on the trading workstation screen.
A calendar spread is a position at one maturity which is hedged by an offsetting position at a different maturity e.g. a short position in six months contract matched by a long position in nine month contract.
The margin on calendar spreads shall be at a flat rate of 0.5% per month of spread on the far month contract subject to a minimum margin of 1% and a maximum margin of 3% on the far side of the spread with legs upto 1 year apart.
during the last five days of trading of the near month contract, the following percentages of a calendar spread shall be treated as a naked position in the far month contract : 100% on day of expiry, 80% one day before expiry, 60% two days before expiry, 40% three days before expiry, 20% four days before expiry.
The mark to market margins need to be collected before start of the next day’s trading. If mark to market margins cannot be collected before start of the next days trading, the clearing corporation/house shall collect correspondingly higher initial margin to cover the potential for losses over the time elapsed in the collection of margins.
The Liquid Net Worth is defined as under : total liquid assets deposited with the exchange / clearing corporation / house towards initial margin and capital adequacy, LESS
Liquid Net Worth shall not be less than Rs 50 lacs at any point of time.
The mark to market value of gross open positions... shall not exceed 331/3 times his liquid networth.
The Calendar Spread shall be regarded as an open position of one third (1/3rd) of the mark to market value of the far month contract.
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Source: SecMarx — Risk Containment Measures for the Index Futures Market. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.