Markets regulator the Securities and Exchange Board of India (Sebi) is planning to introduce the 99 per cent value at risk (VaR)-based margin system for all scrips in the compulsory rolling settlement with effect from July 2.
For the additional 251 scrips, which are to be included in the compulsory rolling settlement effective July 2, exchanges will calculate scrip-wise VaR and index-based VaR and apply the higher of the two as the margin percentage.
The scrip-wise daily volatility will be calculated using the same exponentially weighted moving average methodology that is used in the index futures market and the scrip-wise daily VaR will be calculated as 3.5 times the volatility so calculated.
The index-based VaR will be calculated as the index VaR times a suitable multiplier - the multiplier factor for each of these 251 stocks will be calculated every month by comparing the average volatility of the scrip with the average volatility of the index. This multiplier shall not in any case be less than 1.5.
For the 163 scrips already in the compulsory rolling settlement the margin will be 1.5 times the daily index VaR. The minimum daily index VaR shall be 5 per cent as in the index futures market at present.
The VaR calculated by an exchange at the end of the day would be used for the purpose of margin calculations for the transactions carried out next day.
While these calculations will address 99 per cent of the cases, it would be necessary to have an additional level of margin to address the 1 per cent of the cases to supplement the VaR based margins, it said.
Based on the analysis of historical data of individual stock VaRs, it was felt that additional margin of 12 per cent may be necessary.
The VaR calculations will be based either on the Sensex or NSE's Nifty and would be disseminated by the BSE and NSE daily on their websites by 6:30 pm in a downloadable format.
Other stock exchanges could make their own VaR calculations based on the indices or freely adopt the VaR calculations available on the sites of BSE and NSE.
In addition to the margin calculated on the VaR basis, exchanges shall continue to collect mark-to-market margin.
The exchanges should at their discretion impose additional margin on scrips wherever necessary to contain the risks in the market, the Sebi said.
Sebi said that it has already advised exchanges that a system of direct debit and credit of the members' settlement account should be in place for margin payment and the practice of payment of margin by cheque shall be completely done away with.
