Review of Margin Framework for Cash and Derivatives segments (except for Commodity Derivatives segment)
Summary
This circular mandates a comprehensive review of the margin framework for cash and derivatives segments to enhance risk management efficiency. It establishes specific VaR margin rates and extreme loss margins for various stock groups and ETFs in the cash market. The document further details volatility calculations, price scan ranges, and calendar spread charges for index, single stock, currency, and interest rate derivatives. This section defines the calculation methodology for consolidated crystallized obligation margins on both intraday and end-of-day bases. It introduces additional margin requirements for highly volatile stocks based on specific intra-day price movement thresholds over one-month and six-month periods. The text concludes with implementation directives, effective date, and a list of existing circulars subject to amendment.
Text
Based on the review, it has been decided to effect the following changes to the existing risk management framework.
The VaR margin rates shall be as follows for different groups of stocks: Group I Based on 6σ, subject to minimum of 9%; Group II Based on 6σ, subject to minimum of 21.5%; Group III 50% if traded atleast once per week on any stock exchange; 75% otherwise.
In case of ETFs that track broad based market indices and do not include ETFs which track sectoral indices, the VaR margin rate shall be 6 sigma, subject to minimum of 6%.
The Extreme Loss Margin shall be 3.5% for any stock and 2% for ETFs that track broad based market indices and do not include ETFs which track sectoral indices.
The value of λ, the parameter which determines how rapidly volatility estimation changes in the Exponential Weighted Moving Average (EWMA) method, shall be fixed at 0.995.
The Price Scan Range in respect of various products shall be as follows: Index derivatives Based on 6σ, scaled up by √2 subject to at least 9.3%... Single stock derivatives Based on 6σ, scaled up by √2 subject to at least 14.2%... Currency and interest rate derivatives Based on 6σ, subject to the minimum percentage of underlying price as tabulated below.
The Volatility Scan Range in respect of various products shall be as follows: Index derivatives 25% of annualized EWMA volatility subject to minimum 4%; Single stock derivatives 25% of annualized EWMA volatility subject to minimum 10%; Currency and interest rate derivatives 25% of annualized EWMA volatility subject to minimum 3%.
The Calendar Spread Charge in respect of various products shall be as follows: Index derivatives 1.75% of the far month contract; Single stock derivatives 2.2% of the far month contract; Currency and interest rate derivatives [Table values provided].
There shall be no separate short option minimum charge for index derivatives, single stock derivatives, currency and interest rate derivatives.
The Extreme Loss Margin rates shall be as under: Index derivatives 2% of the notional value; Single stock derivatives 3.5% of the notional value; Currency and interest rate derivatives [Table values provided].
The margin on consolidated crystallized obligation in derivatives shall represent: On intraday Payable crystallized obligations based on the closed out futures basis positions and payable/receivable premium at client level. At end-of-day Payable obligations at client level considering all futures and options positions.
On intraday basis, the net payable/receivable amount at client level shall be calculated using: 1. Premium payable/receivable 2. Futures crystallized profit or loss (calculated based on weighted average prices of trades executed). If the overall amount at client level is payable, such amount shall be the intraday consolidated crystallized obligation margin for the client.
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Source: SecMarx — Review of Margin Framework for Cash and Derivatives segments (except for Commodity Derivatives segment). Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.