General Manager
Secondary Market Department
e-mail : pkb@sebi.gov.in
SMD/Policy/ Cir -
9/2003
To Executive Directors/ Managing Directors
Of all the Stock Exchanges
Dear Sir/Madam,
Sub:-Risk Management for
T+2 rolling settlement
Please refer to our circular dated
The SEBI constituted Group on Secondary Market Risk
Management discussed the issue of the rationalisation of the margining
structure in the shortened T+2 rolling settlement. The Group held various
meetings and pursuant to the deliberations of the Group, the stock exchanges
shall follow risk management structure given below w.e.f.
Categorisation of stocks
for imposition of margins
1.
The
risk containment measures for the scrips would be
based on their volatility and liquidity. The scrips
would be classified into three groups.
2.
The stocks
which have traded atleast 80% (+/-5%) of the days for the previous eighteen
months from (
3.
Out
of the scrips identified above, the scrips having mean impact cost of less than or equal to 1%
shall be categorised under Group I and the scrips
where the impact cost is more than 1, shall be categorised under Group II.
4.
The
remaining stocks would fall into the Group III.
5.
The
impact cost shall be calculated at 15th of each month on a rolling
basis considering the order book snapshots of the previous six months. On the
basis of the impact cost so calculated, the scrips
shall move from one group to another group from the 1st of the next
month.
Calculation
of mean impact cost
6.
The mean
impact cost for the purposes of classification of the scrips
in the two Groups viz. Group I&II would be calculated in the following manner
:
i.
Impact
cost shall be calculated by taking four snapshots in a day from the order book
in the past six months. These four snapshots shall be randomly chosen from
within four fixed ten-minutes windows spread through the day.
ii.
The
impact cost shall be the percentage price movement caused by an order size of
Rs.1 Lakh from the average of the best bid and offer
price in the order book snapshot. The impact cost shall be calculated for both,
the buy and the sell side in each order book snapshot.
iii.
The
computation of the impact cost adopted by the Exchange would be disseminated on
the website of the exchange.
iv.
The
Exchanges shall use a common methodology for carrying out the calculations for
mean impact cost. The details of calculation methodology and relevant data
shall be made available to the public at large through the website of the
Exchanges. Any change in the methodology for the computation of impact cost
would also be disseminated by the Exchange.
Risk containment measures
VaR based margins
7.
For the
stocks in Group I, the VaR margin will be scrip VaR (3.5 sigma) computed in a manner specified for the
scrip on which stock futures are traded.
8.
On
the stocks in Group II where the impact cost is more than 1, the VaR margin shall be higher of scrip VaR
(3.5 sigma) or three times the index VaR, and it
shall be scaled up by root 3.
9.
For
the stocks in Group III, the VaR margin would be
equal to five times the index VaR and scaled up by
root 3.
10.
For
the purposes of determining the margins for Group II & Group III, the
minimum Index VaR would continue to be taken as 5% as
at present.
11.
The
volatility estimates for the scrips and the index for
the VaR shall be computed on the price differential
of 2 days. The VaR calculated by an exchange at the
end of the previous day would be used for the purpose of margin calculations
for the transactions carried out on the day.
Mark
to market margin
12.
In
addition to the collection of the VaR based margins,
the exchanges shall continue to collect mark-to-market margin.
Additional
margin
13.
The
existing 12% additional margin would be phased out progressively. With effect
from
Collection
of margins
14.
All
these margins would be collected on T+1 basis.
Adhoc / Special Margin
15.
The
exchanges should at their discretion may impose
additional margin/adhoc margin/special margin on scrips wherever necessary to contain the risk in the
market.
Gross
Exposure Limits
16.
the existing provision in respect of capital adequacy and the gross
exposure limits shall continue to apply.
Dissemination
to the market
17.
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
18.
Other
stock exchanges could make their own VaR calculations
or freely adopt the VaR calculations available on the
sites of BSE and NSE. It will be
mandatory for BSE/NSE to provide real time Sensex/Nifty/scrip data free. It will also be mandatory for all the stock
exchanges to have real time information of Sensex/Nifty/ scrip data either from
the respective exchange or through a vendor.
The stock exchanges should ensure that the above
margin structure is implemented on
While the above risk management measures is expected
to contain risk in the system, however, the efficacy of the same would be
dependent on monitoring, surveillance and
timely collection of margin by the stock exchanges. For the risk containment measures to be
successful, the exchanges must continue to strengthen their monitoring and surveillance
of broker positions/ client positions vis-a-vis
adequate capital/ margins and adherence to exposure limits and collection
system and to take such timely actions as are expected of them in their
functioning as public institutions and self-regulatory organisations.
The exchanges are advised to take steps to implement
the above and confirm the same to SEBI before
Yours faithfully,
P K Bindlish