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NSE.

IT

RISK MANAGEMENT CONCEPTS


(NEATXS VERSION 3.5 ONWARDS)

NSE.IT
TRADE GLOBE
GROUND FLOOR
ANDHERI-KURLA ROAD
ANDHERI (E)
MUMBAI 400 059

22-july-2003

All rights reserved. No part of this document may be reproduced or transmitted in any form and by any
means without the prior permission of NSE.IT

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TABLE OF CONTENTS
1

INTRODUCTION TO FAO RISK MANAGEMENT............................................1

INTRADAY TURNOVER LIMITS..........................................................................1

SHORT OPTION LIMITS........................................................................................1

MARK TO MARKET (MTM) LIMITS..................................................................2

MARGIN LIMITS.....................................................................................................2
5.1
VALIDATIONS FOR MARGIN LIMITS.......................................................................2
5.2
COMPONENTS OF MARGIN LIMITS.........................................................................2
5.2.1
Portfolio based Margin.................................................................................3
5.2.2
Net buy Premium...........................................................................................5
5.2.3
Realised loss..................................................................................................6
5.2.4
Exposure limit................................................................................................7

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Introduction to FAO Risk Management

For the purpose of risk management, deposits are defined for the user and multipliers
assigned to the deposits in order to arrive at the limits. The following limits are defined
for risk management:
Intraday Turnover Limits
SO Limits (only for clients)
MtM Limits
Margin Limits
For an order entered, the above limits are computed and validated against the max limit
available. If any of the limits are violated, the order will not be sent to the exchange by
the NeatXS server.
The validations for Intraday turnover, MtM and Margin limits happen at the following
levels: PRO / Client, TWS and branch. The validation for Short Option Limit happens
only for Clients.

Intraday Turnover Limits

Intraday turnover is computed for the days transactions at order level. This limit is
computed as qty * price for all futures and buy options orders and as qty * strike price for
sell option orders. The Intraday turnover is computed for every order and checked with
the maximum available Intraday turnover for the client / PRO and TWS and Branch. If
the used exceeds the max as a result of the new order, the order is rejected.
Intraday turnover is computed as validated as the following levels: PRO / Client, TWS,
Branch

Short Option Limits

The Short Option (SO) limits are applicable for Clients only. This limit is computed only
for net sell options positions and open sell option orders. Cover benefit is provided for
sell orders if there is a corresponding buy trade. This value is computed as qty * strike
price. The short option value so computed for all outstanding sell orders and position is
validated against the maximum short option limit set for the client. If the used SO limit is
greater than the maximum SO limit as a result of the new order, the order gets rejected.
SO limits are also computed for outstanding positions.

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Mark To Market (MtM) Limits

MtM limit is computed on every trade and is a combination of realised Profit / loss and
notional loss. Notional Profit is ignored for MtM computation. Notional loss is incurred
when the buy price is greater than the current market price or when sell price is less than
current market price. Realised loss is incurred if the sell average price is less than the buy
average price. Computation of MtM occurs on the outstanding position as well as the
days position.

Margin Limits

Margin requirement for F&O segment is based on portfolio margining system similar to
the Exchange, with the addition that margin is computed in NeatXS system on an order
Level. Since margin computation is on a portfolio level, as soon as a new order request
enters the system the portfolio is generated/modified, margin is computed and compared
with the maximum available margin.

5.1 Validations for Margin Limits


Deposits are set for client, PRO, TWS and Branch and multipliers are set for margin
limit. This defines the maximum margin limit at each level. Multipliers are also defined
for closing margin limit to arrive at the maximum closing margin limit.
The margin limit is based on portfolio margining system, which provides set-off benefits
between contracts with same underlying and between contracts with different calendar
months. Due to these set-offs, a cover order (order opposite to an existing open position)
may actually increase the margin. The closing margin is used for closing open positions
even if it exceeds the original margin limit.
For Example: Client A has margin limit of 1,00,000 and closing margin limit of 1,50,000.
Suppose the client has 2 trades as:
Contract
FUTSTK ACC 31JUL2003
FUTIDX NIFTY 31JUL2003

Qty
+15000
-15000

Individual Margin
Rs.50000
Rs.60000

Due to inter-commodities set off, the portfolio margin is say, Rs.80,000. Now if Client A
wants to close position in FUTSTK ACC by selling 15000 contracts, the margin required
for the portfolio may be greater than Rs. 1.00 lac say Rs.1,20,000. Since it exceeds the
open margin limit of 1,00,000, the order should get rejected. However, since this is a
cover order (order to close an existing position), the value will be compared with the
closing margin limit and the order will be accepted.

5.2 Components of Margin limits

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The following are the components of margin limit:


Portfolio based Margin
Net buy Premium
Realised loss
Exposure limit
A brief explanation of each of the components
5.2.1

Portfolio based Margin

Whenever the User performs any Order or Trade related activity (i.e. entry, modification,
and cancellation), Portfolio gets generated/modified for the trades and orders of the
client. This Portfolio is sent to the Margin Calculator for calculating the margin using the
Risk parameter file received from Exchange on a daily basis.
If the client/proprietary position consists of simple portfolio with no off-setting contracts
in futures and options of the same underlying asset it will work like exposure margin.
If the client / proprietary position consist of portfolio of off setting contracts in futures
and options of the same underlying asset it will give maximum set off for the same
contract and the balance set off to the extent possible for other positions in the same
underlying.
Example for calendar spread
If Client A has net buy NIFTY February futures position of 400 units and sell NIFTY
March futures position of 400 units, portfolio margin computation will give a full set off
and calculate only spread margin.
The margin is computed:
(a)For traded position give portfolio based set off for contracts having the same
underlying asset
(b)For square off orders, set off to the extent of square off will be given while computing
margin
(c ) For other orders margin will be collected as a separate position till it is traded
Example
Portfolio1
This example is based on SPAN parameter file of 5th February 2002
Order/Trade
BUY/SELL
Contract
Contract
Quantity
detail
Descriptor
Trade

Buy

Futures
FUTIDX
on Nifty NIFTY
Feb
28Feb2002
expiry

200

SPAN based
Margin
for
single
position (Rs.)
11014.00

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Trade

Sell

Trade

Buy

Trade

Sell

Futures
on Nifty
March
expiry
Reliance
petro
February
futures
Reliance
petro
March
Futures

FUTIDX
NIFTY
28Mar2002

200

10834.00

FUTSTK
Relpetro
28feb2002

1000

6060.00

FUTSTK
Relpetro
28mar2002

1000

6080.00

Combined Portfolio based margin for portfolio 1 will be Rs 3556/-= (calendar spread
benefit) as per the SPAN Parameter file. This is provided as the spread margin
requirement in the parameter file.
Portfolio 2:
Order/Trade

BUY/SELL

Contract
Detail

Contract
Descriptor

Quantity

Trade

Buy
Sell

FUTIDX
NIFTY
28Feb2002
FUTIDX
NIFTY
28Feb2002

200

Order

Nifty Futures
February
expiry
Nifty Futures
February
expiry

SPAN based
Margin for
single
position
(Rs.)
11014.00

200

10738.00

Combined Portfolio based margin for portfolio 2 will be Rs 10738/-

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Portfolio 3:
Order/Trade

BUY/SELL Contract
Detail

Contract
Descriptor

Quantity

Order

Buy

200

Order

Sell

FUTIDX
NIFTY
28Feb2002
OPTIDX
NIFTY
28Feb2002
1100 CE

SPAN based
Margin
for
single
position (Rs.)
11014.00

200

9090.00

Nifty Futures
February
expiry
Nifty options
strike price
1100
Call
European

Combined Portfolio based margin for portfolio 3 will be Rs. 20104/-

Non-Spread Position
Calendar spread benefits are removed for contracts nearing expiry. I.e 3 days before
expiration date, the portfolios are separated for the near month contracts and two separate
portfolios are created and margin is computed separately.
5.2.2 Net buy Premium
For buy option position the intra day net buy premium is computed as margin
requirement
Margin requirement for options buy contract will be net buy premium. This is computed
only for intra day as the net buy premium is expected to be settled on T+1 basis. Net buy
premium is computed for both trade level as well as order level. While computing trade
level net buy premium, set off is given for any premium receivable by the same client /
trader for the same options contract and across options contract. For order level, set off is
given if it is a square off order.
Example
Premium values given under are only examples and have no relation to the actual prices
prevailing.
Client A
Order/Trade

Buy/Sell

Trade

Buy

Contract Detail

Contract Descriptor

Premium value (+
=sell, -=buy)
Nifty
options OPTIDX
NIFTY -15000
strike price 1100 28Feb2002 1100 CE
Call European Feb
expiry

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Trade

Sell

Nifty
options
strike price 1100
Call European Feb
expiry
Trade
Sell
Nifty
options
strike price 1200
Call
European
March expiry
Order
Buy
Nifty
options
strike price 1200
Call
European
March expiry
Net buy premium requirement for Client A

OPTIDX
NIFTY +10000
28Feb2002 1100 CE
OPTIDX
NIFTY +12000
28Mar2002 1200 CE
OPTIDX
NIFTY -10000
28Mar2002 1200 CE
3000

Client B
Order/Trade

BUY/SELL Contract Detail

Contract Descriptor

Premium value (+
=sell, -=buy)
Trade
Sell
Nifty
options OPTIDX
NIFTY +20000
strike price 1100 28Feb2002 1100 CE
Call
European
Feb expiry
Trade
Buy
Nifty
options OPTIDX
NIFTY -30000
strike price 1100 28Feb2002 1100 CE
Call
European
Feb expiry
Trade
Sell
Nifty
options OPTIDX
NIFTY +12000
strike price 1200 28Mar2002 1200 CE
Call
European
March expiry
Order
Buy
Nifty
options OPTIDX
NIFTY -10000
strike price 1200 28Mar2002 1200 CE
Call
European
March expiry
Net buy premium requirement for Client B
8000
Total Over all trader level net premium requirement will be sum of proprietary level +
individual client net buy premium. In the above case if Client A and Client B belong to
the same dealer, the dealer level net buy premium will be (3000+8000)=Rs.11000/5.2.3 Realised loss
All realized loss made intra day on close out of trade positions in Futures contracts are
retained as margin. This is not carried forward as daily mark to market settlement is done
for futures position. Open positions will be carried forward at closing price of the

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previous day and current days positions are valued at traded price. Realised loss will be
computed at every trade confirmation.
Example
Traded position
Contract
detail

Closed out Buy


quantity
weighted
average
price
3000
45

Reliance
petro
February
futures
Nifty feb 300
futures

1010

Sell weighted Realised loss


average price
35

-30000

1090

Nil

Margin towards realized loss is Rs.30000/5.2.4 Exposure limit


This computation is optional. This is an additional margin, which is computed by
Exchange on the clearing members as per SEBI circular. Exposure limit can be used to
increase the margin requirement over and above the portfolio-based margin. Exposure
margin is computed for all futures position and net sell options positions.
This is the additional 2nd line of margin as specified by SEBI. Exposure is computed as
net buy value and sell value for futures contracts and net sell value for options contract.
Last Traded Contract Price is considered for Futures contracts and Previous Close
underlying Price is considered for Options Contracts for arriving at the net values.
Exposure into the specified margin% will give the exposure limit. The specified % of the
value for margin purpose is parameterized. (SEBI recommended is 3% of the value is
considered for margin if the underlying is Index and 5% is considered if the underlying is
stock)
The Broker has an option to decide whether to calculate and consider Exposure limit as
part of the total margin requirement.
Total margin requirement will be a sum of (a) Portfolio based margin(b)Net buy
premium+(c)Realised loss for closed out position +(d)Exposure limit [Optional].
This total margin is compared against the margin limit. Maximum Margin Limits (i.e.
Deposit * Margin multiplier) have to be entered for the TWS (Trader + All clients
attached to him), the trader (Own-Pro) and his clients. Whenever a trader or a Client
enters any transaction, the NEATXS system will calculate Margin as per above

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mentioned process and compares with maximum available margin limit of the client/
trader If both the Client and trader margin are sufficient then the transaction will be sent
to the Exchange and utilized margin for the client and trader will be updated accordingly.
In case the order is a cover order and the maximum margin is fully used, it is additionally
validated against closing margin and the order is send through if the portfolio margin is
less than the closing margin.

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