A sound risk management system is integral to an efficient clearing and settlement system. NSE introduced for the first time in India, risk containment measures that were common internationally but were absent from the Indian securities markets.

NSCCL has put in place a comprehensive risk management system, which is constantly upgraded to pre-empt market failures. The Clearing Corporation ensures that trading member obligations are commensurate with their networth.

Risk containment measures include capital adequacy requirements of members, monitoring of member performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached, etc.

We will discuss the above in more detail individually

Minimum Base Capital: A Clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation. The CM has also to ensure that BMC is maintained in accordance with the requirements of NSCCL at all points of time, after activation.

Every CM is required to maintain BMC of Rs.50 lakhs with NSCCL in the following manner:

1. Rs.25 lakhs in the form of cash.

2. Rs.25 lakhs in any one form or combination of the below forms:

   1. Cash

   2. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL

   3. Bank Guarantee in favour of NSCCL from approved banks in the specified format.

   4. Approved securities in demat form deposited with approved Custodians.

In addition to the above MBC requirements, every CM is required to maintain BMC of Rs.10 lakhs, in respect of every trading member(TM) whose deals such CM undertakes to clear and settle, in the following manner:

1. Rs.2 lakhs in the form of cash.

2. Rs.8 lakhs in a one form or combination of the following:

   1. Cash

   2. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL

   3. Bank Guarantee in favour of NSCCL from approved banks in the specified format.

   4. Approved securities in demat form deposited with approved Custodians.

Any failure on the part of a CM to meet with the BMC requirements at any point of time, will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including, withdrawal of trading facility and/ore clearing facility, closing out of outstanding positions etc.

Clearing members may provide additional margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL, over and above their minimum deposit requirements, towards initial margin and/ or other obligations.

Clearing members may submit such deposits in any one form or combination of the following forms:

1. Cash

2. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL

3. Bank Guarantee in favour of NSCCL from approved banks in the specified format.

4. Approved securities in demat form deposited with approved Custodians.

All collateral deposits made by CMs are segregated into cash component and non-cash component

For Additional Base Capital, cash component means cash, bank guarantee, fixed deposit receipts, T-bills and dated government securities. Non-cash component shall mean all other forms of collateral deposits like deposit of approved demat securities.

At least 50% of the Effective Deposits should be in the form of cash.

Liquid Networth is computed by reducing the initial margin payable at any point in time from the effective deposits.

The Liquid Networth maintained by CMs at any point in time should not be less than Rs.50 lakhs (referred to as Minimum Liquid Net Worth).

NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system. The actual margining and position monitoring is done on-line, on an intra-day basis. NSCCL uses the SPANŽ (Standard Portfolio Analysis of Risk) system for the purpose of margining, which is a portfolio based system.

NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPANŽ. A CM is in turn required to collect the initial margin from the TMs and his respective clients. Similarly, a TM should collect upfront margins from his clients.

Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts (on index or individual securities), where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin may be computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time.

Initial margin requirement for a member:/P>

For client positions - shall be netted at the level of individual client and grossed across all clients, at the Trading/ Clearing Member level, without any setoffs between clients.

For proprietory positions - shall be netted at Trading/ Clearing Member level without any setoffs between client and proprietory positions.

For the purpose of SPAN Margin, various parameters are specified from time to time.

In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. ABC can be provided by the members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities.

In addition to Initial Margin, Premium Margin would be charged to members. The premium margin is the client wise margin amount payable for the day and will be required to be paid by the buyer till the premium settlement is complete.

Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. It is required to be paid on assigned positions of CMs towards Interim and Final Exercise Settlement obligations for option contracts on individual securities, till such obligations are fulfilled.

The margin is charged on the Net Exercise Settlement Value payable by a Clearing Member towards Interim and Final Exercise Settlement and is deductible from the effective deposits of the Clearing Member available towards margins

Assignment margin is released to the CMs for exercise settlement pay-in.

The initial margin is payable upfront by Clearing Members. Initial margins can be paid by members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securitie

Non-fulfillment of either the whole or part of the margin obligations will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and will attract penal charges @ 0.09% per day of the amount not paid throughout the period of non-payment. In addition NSCCL may at its discretion and without any further notice to the clearing member, initiate other displinary action, inter-alia including, withdrawal of trading facilities and/ or clearing facilityclosing out of outstanding positions, imposing penalties, collecting appropriate deposits, invoking bank guarantees/ fixed deposit receipts, etc.

Clearing Members are subject to the following exposure / position limits in addition to initial margins requirements

Exposure Limits
Trading Memberwise Position Limit
Client Level Position Limits
Market Wide Position Limits (for Derivative Contracts on Underlying Stocks)
Collateral limit for Trading Members

PRISM (Parallel Risk Management System) is the real-time position monitoring and risk management system for the Futures and Options market segment at NSCCL. The risk of each trading and clearing member is monitored on a real-time basis and alerts/disablement messages are generated if the member crosses the set limits.

Initial Margin Violation
Exposure Limit Violation
Trading Memberwise Position Limit Violation
Client Level Position Limit Violation
Market Wide Position Limit Violation
Violation arising out of misutilisation of trading member/ constituent collaterals and/or deposits
Violation of Exercised Positions

Clearing members who have violated any requirement and/ or limits, may submit a written request to NSCCL to either reduce their open position or, bring in additional collateral deposits by way of cash or bank guarantee or FDR or securities. NSCCL renders a service to members, whereby the members can give standing instructions to debit their account towards additional base capital.

A penalty of Rs. 5000/- is levied for each violation and is debited to the clearing account of clearing member on the next business day. In respect of violation on more than one occasion on the same day, each instance is treated as a separate violation for the purpose of calculation of penalty. The penalty is charged to the clearing member irrespective of whether the clearing member brings in margin deposits subsequently

Where the penalty levied on a clearing member/ trading member relates to a violation of Client-wise Position Limit, the clearing member/ trading member may in turn, recover such amount of penalty from the concerned clients who committed the violation.

To compute worst scenario loss on a portfolio, the price scan range for option on individual securities and futures on individual securities would also be linked to liquidity, measured in terms of impact cost for an order size of Rs 5 lakh calculated on the basis of order book snapshots in the previous six months. Accordingly if the mean value of the impact cost exceeds 1%, the price scanning range would be scaled up by square root of three. This would be in addition to the requirement of increasing the price scan range on account of open interest exceeding 80% of the market wide position limits and on account of look ahead period as may be applicable.

The mean impact cost as stipulated by SEBI is calculated at 15th of each month on a rolling basis considering the order book snap shots of previous six months. If the mean impact cost of a security moves from less than or equal to 1% to more than 1%, the price scan range in such underlying shall be scaled by square root of three and scaling shall be dropped when the impact cost drops to 1% or less. Such changes shall be applicable on all existing open position from the third working day from the 15th of each month. The details of impact cost on the list of underlyings on which derivative contracts are available and the methodology of computation of the same are available at our website.

Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront initial margins from all their Trading Members/ Constituents.

CMs are required to compulsorily report, on a daily basis, details in respect of such margin amount due and collected, from the TMs/ Constituents clearing and settling through them, with respect to the trades executed/ open positions of the TMs/ Constituents, which the CMs have paid to NSCCL, for the purpose of meeting margin requirements.

Similarly, TMs are required to report on a daily basis details in respect of such margin amount due and collected from the constituents clearing and settling through them, with respect to the trades executed/ open positions of the constituents, which the trading members have paid to the CMs, and on which the CMs have allowed initial margin limit to the TMs.

CMs/ TMs are required to report details of initial margins collected from their TMs/ Constituents