Risk containment sound

FROM THE ECONOMIC SURVEY 2003-04

The Economic Survey for 2003-04 notes that the core risk containment systems in the Indian equity markets "have sound foundations."

The next steps in improving the robustness of these clearing systems lies in the interfaces between the clearing corporations and the banking system, the Survey adds.

Reporting the results of a stress test on the systems of the National Securities Clearing Corporation (NSCC) between January 2002 and December 2003, the Survey notes that member deposits at the clearing corporation "have always been adequate to cover the extreme event of all the five top trading members failing together".

The Survey notes that this is an extreme stress test in the sense that right from the inception of the NSCC in 1996, the top five clearing members have never failed.

For example, in December 2003, the Survey quotes, the biggest pay-in requirement was on December 8. "If all the top five clearing members were to fail on this date, the NSCC would have been hit with a loss of Rs 574 crore, but the margins on hand and deposits from these members amounted to Rs 1,307 crore. That is, the NSCC was adequately covered in this extreme case.

The Survey identified two 'real world' episodes which tested the risk management systems on the NSCC. On April 10, 2003, the Infosys share price fell 26.8 per cent and that of Mastek plunged by 49.2 per cent. The next day, the Infosys stock fell another 14 per cent.

"These sharp movements were particularly challenging, from a risk management perspective, since they coincided with banking holidays, which impeded the payments of margins.

The second episode, on May 17, 2004, saw the NSE's S&P CNX Nifty fall 7.9 percent from 1717.5 to 1582.4. In both cases, the Survey notes, "the NSCC coped with extreme price movements and all payment obligations were successfully upheld."

"These experiences suggest that the core risk containment system at the NSCC, and supervised by the Securities and Exchange Board of India, has sound foundations," the Survey says, concluding that there is a need for clearing in central bank funds, to avoid the risks to the clearing corporation that can emanate from bank failure.