“Plain the role and importance of the different types of Margins imposed by the NSE in Derivatives Trading”
The Trading of currency futures is subject to maintaining initial, extreme loss, and calendar spread margins and the clearing corporations of the exchanges (In the case of NSE it is NSCCL) should ensure maintenance of such margins by the participants based on the guidelines issued by SEBI from time to time. The clearing corporation acts as counterparty to all contracts traded on the exchange and is responsible for settling all trades. They control their risks, by asking the members to pay margins and provide timely information about their financial condition. There are various types of margins that the clients/ trading members/ clearing members required to deposit: Margins on both Futures and Options contracts comprise of the following: 1) Initial Margin
2) Exposure margin
In addition to these margins, in respect of options contracts the following additional margins are collected
1) Premium Margin
2) Assignment Margin
NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN®. A CM is in turn required to collect the initial margin from the TMs and his respective clients. Similarly, a TM should collect upfront margins from his clients. Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts (on index or individual securities), where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin is computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time. Initial margin requirement for a member:
1. For client positions - is netted at the level of individual client and grossed across all clients, at the Trading/ Clearing Member level, without any setoffs between clients. 2. For proprietary positions - is netted at Trading/ Clearing Member level without any setoffs between client and proprietary positions. For the purpose of SPAN Margin, various parameters are specified from time to time. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. ABC can be provided by the members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities. Additional Base Capital
Clearing members may provide additional margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL, over and above their minimum deposit requirements, towards initial margin and/ or other obligations. Clearing members may submit such deposits in any one form or combination of the following forms: 1. Cash
2. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL 3. Bank Guarantee in favour of NSCCL from approved banks in the specified format. 4. Approved securities in demat form deposited with approved Custodians. How is Initial Margin Computed?
Initial margin for F&O segment is calculated on a portfolio (a collection of futures and option positions) based approach. The margin calculation is carried out using a software called - SPAN® (Standard Portfolio Analysis of Risk). It is a product developed by Chicago Mercantile Exchange (CME) and is extensively used by leading stock exchanges of the world. SPAN uses scenario based approach to arrive at margins. Value of futures and options positions depend on, among others, price of the security in the cash market and volatility of the security in cash market. As you would agree, both price and volatility keep changing. To put it simply, SPAN® generates about 16 different...
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