NSCCL has developed a comprehensive risk containment mechanism for the F&O segment. The salient features of risk containment measures on the F&O segment are:

1. The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent.

2. NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the initial margin requirements for each futures/options contract on a daily basis. It also follows VaR-based margining computed through SPAN. The CM in turn collects the initial margin from the TMs and their respective clients.

3. The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T+1 basis.

4. The exposure of a CM can not exceed 33.3 times the liquid net worth for index options/ futures and 20 times the liquid net worth for stock options/futures.

5. NSCCL's on-line position monitoring system monitors a CM's open position on a real-time basis. Limits are set for each CM based on his base capital. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for MTM value violation, while TMs are monitored for contract-wise position limit violation.

CMs are provided a trading terminal for the purpose of monitoring the open positions of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set up by a CM and whenever a TM exceed the limits, it stops that particular TM from further trading.

1. A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. Position violations result in disablement of trading facility for all TMs of a CM in case of a violation by the CM.

2. A separate Settlement Guarantee Fund for this segment has been created out of the base capital of members. The fund had a balance of Rs. 1,300 crore at the end of March 2003.

The most critical component of risk containment mechanism for F&O segment is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM) using SPAN(R) Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI.

The objective of NSE-SPAN is to identify overall risk in a portfolio of all futures and options contracts for each member. The system treats futures and options contracts uniformly, while at the same time recognising the unique exposures associated with options portfolios, like extremely deep out-of-the-money short positions and inter-month risk.

Its over-riding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day based on 99% VaR methodology. SPAN considers uniqueness of option portfolios. The following factors affect the value of an option:

1. Underlying market price.

2. Volatility (variability) of underlying instrument, and

3. Time to expiration.

4. Interest rate

5. Strike price

As these factors change, the value of options maintained within a portfolio also changes. Thus, SPAN constructs scenarios of probable changes in underlying prices and volatilites in order to identify the largest loss a portfolio might suffer from one day to the next. It then sets the margin requirement to cover this one-day loss.

The complex calculations (e.g. the pricing of options) in SPAN are executed by NSCCL. The results of these calculations are called risk arrays. Risk arrays, and other necessary data inputs for margin calculation are provided to members daily in a file called the SPAN Risk Parameter file. Members can apply the data contained in the Risk Parameter files, to their specific portfolios of futures and options contracts, to determine their SPAN margin requirements. Hence, members need not execute complex option pricing calculations, which is performed by NSCCL. SPAN has the ability to estimate risk for combined futures and options portfolios, and also re-value the same under various scenarios of changing market conditions.