Risk Manage Men at of Mahheelasst

CHAPTER 1
DESIGN OF THE PROJECT
1
DESIGN OF THE PROJECT
INTRODUCTION TO RISK MANAGEMENT
Definitions of risk:
Risk is a Hazard, a source of danger; a possibility of incurring loss or misfortune;

"drinking alcohol is a health hazard"
• a venture undertaken without regard to possible loss or injury; "he saw the
rewards but not the risks of crime"; "there was a danger he would do the
wrong thing"
• expose to a chance of loss or damage; "We risked losing a lot of money in
this venture"; "Why risk your life?"; "She laid her job on the line when she
told the boss that he was wrong"
• the probability of becoming infected given that exposure to an infectious
agent has occurred
• gamble: take a risk in the hope of a favorable outcome; "When you buy these
stocks you are gambling"
• Risk is a concept that denotes a potential negative impact to an asset or some

characteristic of value that may arise from some present process or future
event. In everyday usage, "risk" is often used synonymously with the
probability of a known loss. ...
Risk management
Risk management can be defined as the culture, processes, and structures that
are directed towards the effective management of potential opportunities and adverse
effects.
2
This is a broad definition that can quite rightly apply in nearly all fields of
management from financial and human resources management through to
environmental management. However in the context of contaminated sites, risk
management can be taken to mean the process of gathering information to make
informed decisions to minimise the risk of adverse effects to people and the
environment.
Risk assessment involves estimating the level of risk – estimating the probability of
an event occurring and the magnitude of effects if the event does occur. Essentially
risk assessment lies at the heart of risk management, because it assists in providing
the information required to respond to a potential risk.
In a resource management setting, environmental risk assessment may be used to

help manage, for example:
• natural hazards (flooding, landslides),

• water supply and waste water disposal systems, and
• Contaminated sites.
Human health risk assessment is one form of risk assessment, focusing on assessing
the risk to people and communities from hazardous substances or discharge of
contaminants.
Ecological risk assessment is another form of risk assessment that can be used to
assist management of risks to ecological values.
The focus of risk assessment for contaminated sites is usually human health, as a
large proportion of the known potentially contaminated sites are located in urban
areas. However, where valued natural environments are present, the focus of
ecological risk assessment is on assessing the risks to plants, animals and ecosystem
integrity from chemicals present at or discharging from a contaminated site.
3
NEED FOR THE STUDY (RATIONALE)
Not enough studies are available on this subject and therefore risk in the trading
of the present day is not perceived and managed well by the today’s trader and hence
problems of ups and downs. This study aims to bring out problems and prospects involved
in the system so that the trading community would be benefited by the findings,
conclusions and recommendations of this study. While the study is confined to Hyderabad
only, it can be extended to all India level by future projects based on the findings of this
study.
OBJECTIVES OF THE STUDY:

The objectives of the study are as follows:
Primary objectives
 To know about the Risk management techniques laid down by the securities
exchange board of India.
 To know the Risk management techniques adopted by ISE and about its
communication facilities for the appropriate configuration to set network. This would
link the ISE to individual brokers/members.
 To study about the back up measures with respect to primary communication
facilities, in order to achieve network availability and connectivity back-up options..
 To know about the settlement procedure involved in ISE and also NSDL
operations.
Secondary objectives
 Clearing defining each and every term of the stock exchange trading procedures.
 To make investors aware about the risk management policies lay down by SEBI.
 To know how the investors are protected from fraud
 To know how the settlement guarantee is given to the investors.
4
SCOPE OF STUDY:
The scope of the project is to study and know about Risk management, dealt in
Inter-Connected Stock Exchange. The scope of the project is confined to ISE, NSE
operations and their Risk management tools.
The study is confined to Hyderabad only.
LIMITATIONS OF THE STUDY:

The study confines to the past 2-3 years and present system of the trading procedure in the
ISE and the study is confined to the coverage of all the related issues in brief. The data is
collected from the primary and secondary sources and thus is subject to slight variation
than what the study includes in reality.
Hence accuracy and correctness can be measured only to the extent of what the sample
group has furnished.
The study is valid only for the data collected at Hyderabad on a sample of 50 respondents.
It can be extended to all India level in future.
RESEARCH METHODALOGY
DATA COLLECTION METHODS:

The data collection methods include both the primary and secondary collection methods.
 Primary collection methods: This method includes the data collection through the
face-to-face interactions with the authorized executives and members of the exchange.
 Secondary collection methods: The secondary collection methods includes the
websites, news papers and so on., also the data collected from the news, magazines of
the ISE and different books issues of this study
5
CHAPTER 2
REVIEW OF LITERARURE
6
REVIEW OF LITERATURE
The origin of the Stock Exchanges in India can be traced back to the later half of 19th
century. After the American Civil War (1860-61) due to the share mania of the public, the
number of brokers dealing in shares increased. The brokers organized an informal
association in Mumbai
named “The Native Stock and Share Brokers Association in 1875”.later evolved as
Bombay stock exchange .
Increased activity in trade and commerce during the

First World War and Second World War resulted in an increase in the stock trading. The
Growth of Stock Exchanges suffered a set after the end of World War. World wide
depression affected them most of the Stock Exchanges in the early stages had a speculative
nature of working without technical strength. After independence, government took keen
interest to regulate the speculative nature of stock exchange working. In that direction,
securities and Contract Regulation Act 1956 was passed, this gave powers to Central
Government to regulate the stock exchanges. Further to develop secondary markets in the
country, stock exchanges established at Mumbai, Chennai, Delhi, Hyderabad, Ahmedabad
and Indore. The Bangalore Stock Exchange was recognized in 1963. At present there are
23 Stock Exchanges.
Till recent past, floor trading took place in all Stock Exchanges. In the
floor trading system, the trade take place through open outcry system during the official
trading hours. Trading posts are assigned for different securities where by and sell
activities of securities took place. This system needs a face – to – face contact among the
traders and restricts the trading volume. The speed of the new information reflected on the
prices was rather than the investors.
The Setting up of NSE and OTCEI (Over the counter exchange of India
with the screen based trading facility resulted in more and more Sock exchanges turning
towards the computer based trading. BSE introduced the screen based trading system in
1995, which known as BOLT (Bombay on – line Trading. System). Madras Stock
Exchange introduced Automated Network Trading System (MANTRA) on October 7,
1996 Apart from Bombay Stock Exchanges have introduced screen based trading.
7
Stock exchange is an organized market place where securities are traded. These
securities are issued by the government, semi-government bodies, public sector
undertakings and companies for borrowing funds and raising resources. Securities are
defined as any monetary claims (promissory notes or I.O.U) and also include shares,
debentures, bonds and etc. If these securities are marketable as in the case of the
government stock, they are transferable by endorsement and alike movable property. They
are tradeable on the stock exchange. So is the case shares of companies.
Under the Securities Contract Regulation Act of 1956, securities’
trading is regulated by the Central Government and such trading can take place only in
stock exchanges recognized by the government under this Act. As referred to earlier there
are at present 23 such recognized stock exchanges in India. Of these, major stock
exchanges, like Bombay Stock Exchange National Stock Exchange,Inter-Connected Stock
Exchange, Culcutta, Delhi, Chennai, Hyderabad and Bangalore etc. are permanently
recognized while a few are temporarily recognized. The above act has also laid down that
trading in approved contract should be done through registered members of the exchange.
As per the rules made under the above act, trading in securities permitted to be traded
would be in the normal trading hours (10 A.M to 3.30 P.M) on working days in the trading
ring, as specified for trading purpose. Contracts approved to be traded are the following:
A. Spot delivery deals are for deliveries of shares on the same day or the next day as
the payment is made.
B. Hand deliveries deals for delivering shares within a period of 7 to 14 days from the
date of contract.
C. Delivery through clearing for delivering shares with in a period of two months from
the date of the contract, which is now reduce to 15 days.(Reduced to 2 days in demat
trading)
D. Special Delivery deals for delivering of shares for specified longer periods as may
be approved by the governing board of the stock exchange.
Except in those deals meant for delivery on spot basis, all the rest are to be
put through by the registered brokers of a stock exchange. The securities contracts
(Regulation) rules of 1957 laid down the condition for such trading, the trading hours,
rules of trading, settlement of disputes, etc. as between the members and of the members
with reference to their clients.
8
CHAPTER 3
INTRODUCTION TO STOCK
EXCHANGE
&
COMAPANY PROFILE
9
Introduction to stock exchange
Stock exchange is an organized market place where securities are traded. The government,
semi-government bodies, public sector undertakings and companies for borrowing funds
and raising resources issue these securities. Securities are defined as any monetary claims
(promissory notes or I.O.U) and also include shares, debentures, bonds and etc.
If these securities are marketable as in the case of the government stock, they are
transferable by endorsement and alike movable property. They are tradable on the stock
exchange. So is the case share of companies.
Under the Securities Contract Regulation Act of 1956, securities’

trading is regulated by the Central Government and such trading can take place only in
stock exchanges recognized by the government under this Act. As referred to earlier there
are at present 23 such recognized stock exchanges in India. Of these, major stock
exchanges, like Bombay Stock Exchange National Stock Exchange,Inter-Connected Stock
Exchange, Calcutta, Delhi, Chennai, Hyderabad and Ban galore etc. are permanently
recognized while a few are temporarily recognized. The above act has also laid down that
trading in approved contract should be done through registered members of the exchange.
As per the rules made under the above act, trading in securities permitted to be traded
would be in the normal trading hours (10 A.M to 3.30 P.M) on working days in the trading
ring, as specified for trading purpose.
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FUNCTIONS OF STOCK EXCHANGE
Maintain Active Trading: Shares are traded on the stock exchanges, enabling
the investors to buy and sell securities. The prices may vary from transaction to
transaction. A continuous trading increases the liquidity or marketability of the shares
traded on the stock exchanges.
Fixation of Prices: Price is determined by the transactions that flow from investors
demand and the supplier’s preferences. Usually the traded prices are made known to the
public. This helps the investors to make the better decision.
Ensures safe and fair dealings: The rules, regulations and bylaws of the
Stock Exchanges provide a measure of safety to the investors. Transactions are conducted
under competitive conditions enabling the investors to get a fair deal.
Aids in financing the Industry: A continuous market for shares provides a

favourable climate for raising capital. The negotiability and transferability of the
securities, investors are willing to subscribe to the initial public offering (IPO). This
stimulates the capital formation.
Dissemination of Information: Stock Exchanges provide information through

their various publications. They publish the share prices traded on their basis along with
the volume traded. Directory of Corporate Information is useful for the investor’s
assessment regarding the corporate. Handouts, handbooks and pamphlets provide
information regarding the functioning of the Stock Exchanges.
Performance Inducer: The prices of stocks reflect the performance of the
traded companies. This makes the corporate more concerned with its public image and
tries to maintain good performance.
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Self-regulating organization: The Stock Exchanges monitor the integrity of the
members, brokers, listed companies and clients. Continuous internal audit safeguards the
investors against unfair trade practices. It settles the disputes between member brokers,
investors and brokers.
REGULATORY FRAME WORK
This Securities Contract Regulation Act, 1956 and Securities and Exchange
board of India (SEB1) Act, 1992, provides a comprehensive legal framework. A 3-tier
regulatory structure comprising the ministry of finance, SEB1 and the Governing Boards
of the Stock Exchanges regulates the functioning of Stock Exchanges.
Ministry of finance: The Stock Exchange division of the Ministry of Finance

has powers related to the application of the provision of the SCR Act and licensing of
dealers in the other area. According to SEBI Act, The Ministry of Finance has the appellate
and the supervisory power over the SEBI. It has powered to grant recognition to the Stock
Exchange and regulation of their operations. Ministry of Finance has the power to approve
the appointments of executives chiefs and the nominations of the public representatives in
the government Boards of the Stock Exchanges. It has the responsibility of preventing
undesirable speculation.
The Securities and Exchange Board of India
The Securities and Exchange Board of India even though established in the year
1988. Received statutory powers only on 30th January 1992. Under the SEBI Act, a wide
variety of powers are vested in the hands of SEBI. SEBI has the powers to regulate the
business of Stock Exchanges, other security and mutual funds. Registration and regulation
of market intermediaries are also carried out by SEBI. It has responsibility to prohibit the
fraudulent unfair trade practices and insider dealings. Takeovers are also monitored by the
SEBI has the multi pronged duty to promote the healthy growth of the capital market and
protect the investors.
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The Governing Board of stockexchanges: The Governing Board of the Stock Exchange
consists of elected members of directors, government nominees and public representatives.
Rules, by law and regulations of the Stock Exchange substantial powers to the executive
director for maintaining efficient and smooth day-to day functioning of Stock Exchange.
The Governing Board has the responsibility to maintain and orderly and well-regulated
market.
The Governing body of the Stock Exchange consists of 13 members of which

A. Six members of the Stock Exchange are elected by the members of the Stock
Exchange.
B. Central Government nominates not more than three members.
C. The board nominates three public representatives.
D. SEBI nominates persona not exceeding three and
E. The Stock Exchange appoints one Executive Director.
One third of the elected members retire at annual general meeting (AGM).
The retired member can offer himself for election if he is not elected for two consecutive
years. If a member serves in the governing body for two years consecutively, he should
refrain offering himself for another two years.
The members of the governing body elect the president and vice-president. It
needs to approval from the Central Government or the Board. The office tenure for the
president and vice-president is on year. They can offer themselves for re-election, if they
have not held for two consecutive years. In that case they can offer themselves for re-
election after a gap of one-year period.
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INTRODUCTION TO NATIONAL STOCK EXCHANGE
The National Stock Exchange (NSE) of India became operational in

the capital market segment on third November 1994 in Mumbai. The genesis of the NSE
lies in the recommendations of the pherwani committee (1991). Apart from the NSE. It had
recommended for the establishment of National Stock market System also. The committee
pointed out some major defects in the Indian stock market. The defects specified are.
1. Lack of liquidity in most of the markets in terms of depth and breadth.
2. Lack of ability to develop markets for debt.
3. Lack of infrastructure facilities and outdated trading system.
4. Lack of transparency in the operations that affect investors’ confidence.
5. Outdated settlement system that are inadequate to cater to the growing volume,
leading to delays.
6. Lack of single market due to the inability of various stock exchanges to
function cohesively with legal structure and regulatory framework.
These factors led to the establishment of the NSE.
The main objectives of NSE are as follows
1). To establish a nation wide trading facility for equities, debt and hybrid
instruments
2). To ensure equal access investors all over the country through
appropriate communication network.
3). To provide a fair, efficient and transparent securities market to investors
using an electronic communication network.
4). To enable shorter settlement cycle and book entry settlement system.
5). To meet current international standards of securities market.
Promoters of NSE: IDBI, ICICI, IFCI, LIC, GIC, SBI, Bank of Baroda. Canara
Bank, Corporation Bank, Indian Bank, Oriental Bank of Commerce. Union Bank of
India, Punjab National Bank, Infrastructure Leasing and Financial Services, Stock
Holding Corporation fo India and SBE capital market are the promoters of NSE.
MEMBERSHIP:
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Membership is based on factors such as capital adequacy, corporate structure,
track record, education, experience etc. Admission is a two-stage process with
applicants requiring going through a written examination followed by an interview. A
committee consisting of experienced people from the industry to assess the applicant’s
capability to operate as an exchange member, interviews candidates. The exchange
admits members separately to Wholesale Debt Market (WDM) segment and the capital
market segment. Only corporate members are admitted on the debt market segment
whereas individuals and firms are also eligible on the capital market segment.
Eligibility criteria for trading membership on the segment of WDM are as follows.
1). The persons eligible to become trading members are bodies corporate,
companies institutions including subsidiaries of banks engaged in financial services
and such other persons or entities as may be permitted form time to time by RBI/SEBI.
2).The whole-time directors should possess at least two years experience in any
activity related to banking or financial services or treasury.
3).The applicant must possess a minimum net worth of Rs.2 crores.
4).The applicant must be engaged solely ion the business of securities and must
not be engaged in any fund-based activities.
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The eligibility criteria for the capital market segment is ;
1). Individuals, registered firms, bodies corporate, companies and such other persons
may be permitted under SCRA, 1957.
2). The applicant must be engaged in the business of securities and must not be
engaged in any fund-based activities.
3). The minimum net worth requirements prescribed are as follows;
a). Individual and registered firms – Rs.100 Lacs.
b).Corporate bodies – Rs. 100 Lacs.
.
4). The minimum prescribed qualification of graduation and two years experience of
handling securities as broker, sub-broker, authorized assistant, etc must be fulfilled by
a) Minimum two directors in case the applicant is a corporate
b). Minimum two partners in case of partnership firms and
c). The individual in case of individual or sole proprietary concerns.
The two experienced director in a corporate applicant or trading member should hold
minimum of 5% of the capital of the company.
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Present Trading Mechanism
The National system provides single, nation wide Securities. It enables

investors in one part of the country to trade at the best quotes with an investors located in
any other part of the country through the members of the stock exchanges and
subsequently clears and settles the trade in an efficient and cost effective manner.
The primary objective of the stock market is to provide clear opportunity to the investors
throughout the country to trade any securities irrespective of the size of the order or the
broker through whom the order is routed. This provides the facility to execute the buy out
any extra cost to the investors.
There will be no trading floor in the exchanges. Instead, each trading member will have a
computer at his own office any where in India which will be connected to the central
computer system at the NSE through leased lines or VSAT’s (Very Small Aperture
Terminal), for an interim transition period of six months and subsequently by satellite link.
VSAT’s are relatively smaller dishes similar to dish antenna for cable T.V and have the
benefit of not being very expensive.
A satellite network makes it possible to connect almost all the parts of the nation quickly
as it is easy to install, as against the ground lines
Such as dial up modems leased lines which are prone to disruptions, satellite links on other
hands ensure high speed, availability and quality of the connection. This code of trading is
known as “On-line Trading”.
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INTRODUCTION TO ISE
Inter-connected stock exchange of India limited [ISE] has been promoted by 14 Regional
stock exchanges to provide cost-effective trading linkage/connectivity to all the members
of the participating Exchanges, with the objective of widening the market for the securities
listed on these Exchanges. ISE aims to address the needs of small companies and retail
investors with the guiding principle of optimizing the existing infrastructure and
harnessing the potential of regional markets, so as to transform these into a liquid and
vibrant market through the use of state-of-the-art technology and networking.
The participating Exchanges of ISE in all about 4500 stock brokers, out of
which more than 200 have been currently registered as traders on ISE. In order to leverage
its infrastructure and to expand its nationwide reach, ISE has also appointed around 450
Dealers across 70 cities other than the participating Exchange centers. These dealers are
administratively supported through the regional offices of ISE at Delhi [north], kolkata
[east], Coimbatore, Hyderabad [south] and Nagpur [central], besides Mumbai.
ISE has also floated a wholly-owned subsidiary, ISE securities and services
limited [ISS], which has taken up corporate membership of the National Stock Exchange
of India Ltd. [NSE] in both the Capital Market and Futures and Options segments and The
Stock Exchange, Mumbai In the Equities segment, so that the traders and dealers of ISE
can access other markets in addition to the ISE markets and their local market. ISE thus
provides the investors in smaller cities a one-stop solution for cost-effective and efficient
trading and settlement in securities.
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With the objective of broad basing the range of its services, ISE has started
offering the full suite of DP facilities to its Traders, Dealers and their clients.
OBJECTIVES OF ISE:
1. Create a single integrated national level solution with access to multiple markets
for providing high cost-effective service to millions of investors across the country.
2. Create a liquid and vibrant national level market for all listed companies in general
and small capital companies in particular.
3. Optimally utilize the existing infrastructure and other resources of participating
Stock Exchanges, which are under-utilized now.
4. Provide a level playing field to small Traders and Dealers by offering an
opportunity to participate in a national markets having investment-oriented business.
5. Reduce transaction cost.
6. Provide clearing and settlement facilities to the Traders and Dealers across the
Country at their doorstep in a decentralized mode.
7. Spread demat trading across the country
SALIENT FEATURES OF ISE
Network of intermediaries:
As at the beginning of the financial year 2003-04, 548 intermediaries (207
Traders and 341 Dealers) are registered on ISE. A broad of members forms the bedrock for
any Exchange, and in this respect, ISE has a large pool of registered intermediaries who
can be tapped for any new line of business.
Robust Operational Systems:
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The trading, settlement and funds transfer operations of ISE and ISS are
completely automated and state-of-the-art systems have been deployed. The
communication network of ISE, which has connectivity with over 400 trading members
and is spread across46 cities, is also used for supporting the operations of ISS. The trading
software and settlement software, as well as the electronic funds transfer arrangement
established with HDFC Bank and ICICI Bank, gives ISE and ISS the required operational
efficiency and flexibility to not only handle the secondary market functions effectively, but
also by leveraging them for new ventures.
Skilled and experienced manpower:

ISE and ISS have experienced and professional staff, who have wide
experience in Stock Exchanges/ capital market institutions, with in some cases, the
experience going up to nearly twenty years in this industry. The staff has the skill-set
required to perform a wide range of functions, depending upon the requirements from time
to time.
Aggressive pricing policy
The philosophy of ISE is to have an aggressive pricing policy for the various
products and services offered by it. The aim is to penetrate the retail market and strengthen
the position, so that a wide variety of products and services having appeal for the retail
market can be offered using a common distribution channel. The aggressive pricing policy
also ensures that the intermediaries have sufficient financial incentives for offering these
products and services to the end-clients.
Trading, Risk Management and Settlement Software Systems:

The ORBIT (Online Regional Bourses Inter-connected Trading) and AXIS
(Automated Exchange Integrated Settlement) software developed on the Microsoft NT
platform, with consultancy assistance from Microsoft, are the most contemporary of the
trading and settlement software introduced in the country. The applications have been built
on a technology platform, which offers low cost of ownership, facilitates simple
maintenance and supports easy up gradation and enhancement. The soft wares are so
designed that the transaction processing capacity depends on the hardware used; capacity
can be added by just adding inexpensive hardware, without any additional software work.
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Vibrant Subsidiary Operations:
ISS, the wholly owned subsidiary of ISE, is one of the biggest Exchange
subsidiaries in the country. On any given day, more than 250 registered intermediaries of
ISS traded from 46 cities across the length and breadth of the country.
CHAPTER 4
21
THEORETICAL
FRAMEWORK
TRADING PROCEDURE BEFORE ON-LINE
THE TRADING RING:

Trading on stock exchanges is officially done in the ring for a few hours from 11.00
A.M to 2.30P.M. Trading before or after official hour is called KERB TRADING. In the
trading ring space is provided for specified and non-specified sections. The members of
their authorized assistants have to wear a badge or carry with them identify cards given by
the exchange to enter the trading ring. They carry a Sauda book or confirmation memos
duly authorized by exchange. The stock exchanges operations at floor level are highly
technical in nature. Non-members are not permitted to enter into stock market. Hence,
various stages have to be completed in executing a transaction at a stock exchange. The
steps involved in the methods of trading have been given below:
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A.CHOICE OF BROKER:
The prospective investor who wants to buy shares or the investor who wants to sell his
shares cannot enter into hall of the exchange and transact business. They have to act
through only member brokers. They can also appoint their bankers for this purpose. Since,
bankers can become members of stock exchange as per the present regulations.
So, the first task in transacting business on stock exchanges is to choose a broker of repute
or banker. Such people’s can ensure prompt and quick execution of a transaction at the
possible price.
At present there are 4500 authorized brokers in ISE.
INTODUCTION TO ONLINE TRADING
Gone are the days of trading on the floor. Technology has changed the landscape
of the stock markets. The look of the stock exchanges has undergone metamorphic changes
in the recent years. Prior to online trading, regional stock exchange was playing a very
important role in capital markets, as they were local investors. Regional SE, which was
unable to interact with other SEs started developing this own screen based trading and
connecting to other scrip’s which were not available with them. This also helped in
accessing the quotes and other market information from other stock exchange which
proved vital in the functioning of the system as a whole.
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The trading network is depicted in given below NSE has main computer which
is connected through Very Small Aperture Terminal (VSAT) installed at its office. The
main computer runs on a fault tolerant STRATUS mainframe computer at the Exchange.
Brokers have terminals (identified as the PCs in the given picture) installed at their
premises which are connected through VSATs/ leased lines/modems. An investor informs
a broker to place an order on his behalf. The broker enters the order through his PC, which
runs under Windows NT and sends signal to the satellite via VSAT/leased line/modem.
The signal is directed to mainframe computer at NSE via VSAT at NSE’s office. A
message relating to the order activity is broadcast to the respective member. The order
confirmation message is immediately displayed on the PC of the broker. This order
matches with the existing passive order(S) otherwise it waits for the active orders to enter
the system. On order matching, a message is broadcast to the respective member.
TRADING NETWORK
HUB
ANTENNA
SATELITE
24
NSE MAINFRAME BROKERS PREMISES
CORPORATE HIERARCHY
The Trading member has the facility of defining a hierarchy amongst its users of the
NEAT system. The hierarchy comprises:
Corporate Manager
Branch 1 Branch 2
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Dealer 1 Dealer 2 Dealer 11 Dealer 12
The users of the trading system can logon as either of the user type. The
significance of each type is explained below:
A. Corporate Manager: The corporate manager is a term assigned to a user placed at the
highest level in a trading firm. The facility to set Branch order value limits and user order
value limits is available to the corporate manager.
B. Branch Manager: The branch manager is term assigned to a user who is placed under
the corporate manager. The branch manager can set user order value limits for each of his
branch.
B. Dealer: Dealers are users at the lower most level of the hierarchy. A dealer can view
and perform order and related activities only for oneself.
Easier transaction processing.
Profit in time: Investor can make profits by selling shares when the going is good. They do
not have to instruct their brokers on the cut off price to sell shares.
Ease and transparency: Since the broking, bank and demat account are all electronically
connected, all transaction get updated, demat account shows the latest stockholding
statement while the bank account shows the balance amount after buying or selling of
shares.
Precaution: Check for hidden costs of broker’s age. Beware of net seamstress. Never
double click the mouse during execution of trade avoids cyber cafes and change password
regularly.
26
Less fees: shares traded online require no human intervention to match buys and sells. This
means that commission costs are cut dramatically for the frequent investor.
CLEARING & SETTLEMENT TRADING MECHANISM
The clearing and settlement mechanism in India securities market has witnessed
several innovations during the last decade. These include use of the state-of-art information
technology, compression of settlement cycle, dematerialization and electronic transfer of
securities, securities lending and borrowing, professionalisation of trading members, fine-
tuned risk management system, emergence of clearing corporation to assume counterparty
risk etc., though many these are yet to permeate the whole market.
Till recently, the stock exchanges in India were following a system of account period
settlement for cash market transactions, expert for transaction in a few active securities,
which were settled under t+3 rolling settlement. The rolling settlement has been introduced
for all securities. With effect from April 1, 2003 T+2 rolling settlement has been
introduced. The stock exchange were also offering deferral products to provide leverage to
members to postpone their settlement obligations. The transaction are not settled
immediately but after 2 days after the trade day. The members receive the funds/securities
in accordance with the pay-in/pay-out schedules notified by the respective exchanges.
Given the growing volume of trades and market volatility, the time gap between trading
and settlement gives rise to settlement risk. In recognition of this, the exchanges and their
clearing corporation employ risk management practices to ensure timely settlement of
trades. The regulators have also prescribed elaborate margining and capital adequacy
standards to secure market integrity and protect the interests of investors. The exchanges
not providing counter-party guarantee have been advised by SEBI to set up trade guarantee
27
funds, which would honour pay-in liabilities in the event of default by a member. In
pursuance to this, 16 out of 23 exchanges have set up trade/settlement guarantee funds.
The trades are settled irrespective of default by a member and the exchange follows up the
defaulting member subsequently for recovery of his dues to the exchange. The market has
full confidence that settlements will take place in time and will be completed irrespective
of possible default by isolated trading members.
Movement of securities has become almost instantaneous in the dematerialized

environment. Two depositories viz., National Securities Depositories Ltd. (NSDL) and
Central Depositories Services Ltd. (CDSL) provide electronic transfer securities and more
then 99% of turnover is settled in dematerialized form. All actively traded scrip’s are held,
traded and settled in demat form. The obligations of members are downloaded to
members/custodians by the clearing agency. The members/custodians make available the
required securities in their pool accounts with Depository Participants (DPs) by the
prescribed pay-in time for securities. The depository transfers the securities from the pool
accounts of members/custodians to the settlement account of the clearing agency. As per
the schedule determined by the depository from the settlement account of the clearing
agency to the pool accounts of members/custodians. The pay-in and pay-out of securities is
affected on the same day for all settlements.
CHAPTER 5
28
RISK MANAGEMENT
PRACTICES
Risk Management in NSE
Margins
Margins collection from Client
Margin Shortfall
Liquid assets
29
Exemption for institutional deals
Exemption upon delivery of securities
Margins
Categorization of stocks for imposition of margins
• The Stocks which have traded at least 80% of the days for the previous six
months shall constitute the Group I and Group II.
• Out of the scrip’s identified above, the scrip’s having mean impact cost of
less than or equal to 1% shall be categorized under Group I and the scrip’s
where the impact cost is more than 1, shall be categorized under Group II.
• The remaining stocks shall be classified into Group III.
• The impact cost shall be calculated on the 15th of each month on a rolling
basis considering the order book snapshots of the previous six months. On
the basis of the impact cost so calculated, the scrips shall move from one
group to another group from the 1st of the next month.
• For securities that have been listed for less than six months, the trading
frequency and the impact cost shall be computed using the entire trading
history of the security.
• Categorisation of newly listed securities
For the first month and till the time of monthly review a newly listed security
shall be categorised in that Group where the market capitalization of the
newly listed security exceeds or equals the market capitalization of 80% of
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the securities in that particular group. Subsequently, after one month,
whenever the next monthly review is carried out, the actual trading frequency
and impact cost of the security shall be computed, to determine the liquidity
categorization of the security.
In case any corporate action results in a change in ISIN, then the securities
bearing the new ISIN shall be treated as newly listed security for group
categorization.
Daily margins payable by members consists of the following:
1. Value at Risk Margin

1. Extreme Loss Margin
2. Mark to Market Margin
Daily margin, comprising of the sum of VaR margin, Extreme Loss Margin and
mark to market margin is payable.
Value at Risk Margin
All securities are classified into three groups for the purpose of VaR margin
For the securities listed in Group I, scrip wise daily volatility calculated using the
exponentially weighted moving average methodology shall be applied to daily
returns in the same manner as in the derivatives market. The scrip wise daily VaR
would be 3.5 times the volatility so calculated subject to a minimum of 7.5%.
For the securities listed in Group II, the VaR margin shall be higher of scrip VaR
(3.5 sigma) or three times the index VaR, and it shall be scaled up by root 3.
For the securities listed in Group III, the VaR margin would be equal to five times
the index VaR and scaled up by root 3.
31
In case of securities in Trade for Trade segment (TFT segment) VaR as applicable to
Group 3 (illiquid securities) shall be applicable
VaR margin rate for a security constitutes the following:
1. Value at Risk (VaR) based margin, which is arrived at, based on the methods
stated above. The index VaR, for the purpose, would be the higher of the
daily Index VaR based on S&P CNX NIFTY or BSE SENSEX. The index
VaR would be subject to a minimum of 5%.
2. Security specific Margin: NSCCL may stipulate security specific margins for
the securities from time to time.
The VaR margin rate computed as mentioned above will be charged on the net
outstanding position (buy value-sell value) of the respective clients on the respective
securities across all open settlements. There would be no netting off of positions
across different settlements. The net position at a client level for a member are
arrived at and thereafter, it is grossed across all the clients including proprietary
position to arrive at the gross open position.
For example, in case of a member, if client A has a buy position of 1000 in a security
and client B has a sell position of 1000 in the same security, the net position of the
member in the security would be taken as 2000. The buy position of client A and sell
position of client B in the same security would not be netted. It would be summed up
to arrive at the member’s open position for the purpose of margin calculation.
The VaR margin shall be collected on an upfront basis by adjusting against the total
liquid assets of the member at the time of trade.
The VaR margin so collected shall be released on completion of pay-in of the

settlement.
The details of all margins (VAR, extreme loss margin and mark to market) as at end
32
of each day will be downloaded to members in their respective Extranet directory.
Extreme Loss Margin
The Extreme Loss Margin for any security shall be higher of:
1. 5%, or
2. 1.5 times the standard deviation of daily logarithmic returns of the security
price in the last six months. This computation shall be done at the end of each
month by taking the price data on a rolling basis for the past six months and
the resulting value shall be applicable for the next month.
The Extreme Loss Margin shall be collected/ adjusted against the total liquid assets
of the member on a real time basis.
The Extreme Loss Margin shall be collected on the gross open position of the
member. The gross open position for this purpose would mean the gross of all net
positions across all the clients of a member including its proprietary position.
There would be no netting off of positions across different settlements. The Extreme
Loss Margin collected shall be released on completion of pay-in of the settlement.
The details of all margins (VAR, extreme loss margin and mark to market) as at end
of each day will be downloaded to members in their respective Extranet directory.
Mark-to-Market Margin
Mark to market loss shall be calculated by marking each transaction in security to the
closing price of the security at the end of trading. In case the security has not been
traded on a particular day, the latest available closing price at the NSE shall be
considered as the closing price. In case the net outstanding position in any security is
33
nil, the difference between the buy and sell values shall be considered as notional
loss for the purpose of calculating the mark to market margin payable.
The mark to market margin (MTM) shall be collected from the member before the
start of the trading of the next day.
The MTM margin shall also be collected/adjusted from/against the cash/cash

equivalent component of the liquid net worth deposited with the Exchange.
The MTM margin shall be collected on the gross open position of the member. The
gross open position for this purpose would mean the gross of all net positions across
all the clients of a member including its proprietary position. For this purpose, the
position of a client would be netted across its various securities and the positions of
all the clients of a broker would be grossed.
There would be no netting off of the positions and setoff against MTM profits across
two rolling settlements i.e. T day and T-1 day. However, for computation of MTM
profits/losses for the day, netting or setoff against MTM profits would be permitted.
In case of Trade for Trade Segment (TFT segment) each trade shall be marked to
market based on the closing price of that security.
The MTM margin so collected shall be released on completion of pay-in of the

settlement.
Margins collection from Client
Members should have a prudent system of risk management to protect themselves

from client default. Margins are likely to be an important element of such a system.
The same shall be well documented and be made accessible to the clients and the
34
Stock Exchanges. However, the quantum of these margins and the form and mode of
collection are left to the discretion of the members.
Margin Shortfall
In case of any shortfall in margin:
• The members shall not be permitted to trade with immediate effect.
• Penalty for margin violation
Penalty applicable for margin violation shall be levied on a monthly basis based on
slabs as mentioned below:
Instances of
Penalty to be levied
Disablement
1st instance 0.07% per day
2nd to 5th instance
0.07% per day +Rs.5000/- per instance from 2nd to 5th instance
of disablement
6th to 10th
0.07% per day+ Rs. 20000 ( for 2nd to 5th instance) +Rs.10000/-
instance of
per instance from 6th to 10th instance
disablement
0.07% per day +Rs. 70,000/- (for 2nd to 10th instance)
11th instance +Rs.10000/- per instance from 11th instance onwards.
onwards Additionally, the member will be referred to the Disciplinary
Action Committee for suitable action
Instances as mentioned above shall refer to all disablements during market hours in a
35
calendar month. The penal charge of 0.07% per day shall be applicable on all
disablements due to margin violation anytime during the day.
Liquid assets
Members are required to provide liquid assets which adequately cover various
margins & base minimum capital requirements. Liquid assets of the member include
their Initial membership deposits including the security deposits. Members may
provide additional collateral deposit towards liquid assets, over and above their
minimum membership deposit requirements
The acceptable forms of capital towards liquid assets and the applicable haircuts are
listed below:
1. Cash Equivalents:
a. Cash
b. Bank fixed deposits (FDRs) issued by approved banks and
deposited with approved Custodians or NSCCL
c. Bank Guarantees (BGs) in favour of NSCCL from
approved banks in the specified format.
d. Government Securities. The procedure for acceptance and
list of securities is as specified in circular. Applicable
haircut is 10%.
e. Units of liquid mutual funds or government securities
mutual funds as decided by NSCCL from time to time.
Applicable haircut is 10%.
2. Other Liquid assets:
36
a. Liquid (Group I) Equity Shares in demat form, as specified by NSCCL
from time to time deposited with approved Custodians. Haircuts applied are
equivalent to the VaR margin for the respective securities.
b. Mutual fund units other than those listed under cash equivalents decided
by NSCCL from time to time. Haircut equivalent to the VaR margin for
the units computed using the traded price if available, or else, using the
NAV of the unit treating it as a liquid security.
Exemption for institutional deals
Institutional businesses i.e., transactions done by all institutional investors shall be

exempt from margin payments. For this purpose, institutional investors shall include
• Foreign Institutional Investors registered with SEBI. (FII)
• Mutual Funds registered with SEBI. (MF)
• Public Financial Institutions as defined under Section 4A of the Companies

Act, 1956. (DFI)
• Banks, i.e., a banking company as defined under Section 5(1)(c) of the

Banking Regulations Act, 1949. (BNK)
• Insurance companies registered with IRDA. (INS)
1 Institutional Transactions:
37
• Institutional transactions shall be identified by the use of the participant code
at the time of order entry.
• Transactions entered into on behalf of custodial participants i.e. carrying

custodial participant code shall be considered as institutional deals unless not
confirmed by the respective custodians in which case the transactions shall be
considered as a normal transactions and all applicable margins shall be levied
on the members.
• Non-Custodial Institutional Transactions shall be identified by the use of the

participant code ‘NCIT’. The ‘NCIT’ transaction shall be exempted only for
margin purposes and the settlement obligation shall remain with the member.
Non-Custodial Institutional transactions, which are not marked, as ‘NCIT’ at
the time of order entry, shall not be exempt from margins.
• Members are required to enter only the above five categories, if applicable,
while reporting Non-Custodial Institutional deals (NCIT) and contraction of
unallocated OTRs.
• Reporting and other procedures regarding ‘NCIT’ and Institution transactions

shall continue as per the current procedure.
In cases where early pay-in of securities is made prior to the securities pay-in,
such positions for which early pay-in (EPI) of securities is made shall be exempt
from margins. The EPI would be allocated to clients having net deliverable position,
on a random basis. However, members shall ensure to pass on appropriate early pay-
in benefit of margin to the relevant clients
Other Liquid assets:
a. Liquid (Group I) Equity Shares in demat form, as specified by NSCCL from

time to time deposited with approved Custodians. Haircuts applied are
equivalent to the VaR margin for the respective securities.
38
Mutual fund units other than those listed under cash equivalents decided by NSCCL
from time to time. Haircut equivalent to the VaR margin for the units computed
using the traded price if available, or else, using the NAV of the unit treating it as a
liquid securiExemption for institutional deals
Institutional businesses i.e., transactions done by all institutional investors shall be

exempt from margin payments. For this purpose, institutional investors shall include
• Foreign Institutional Investors registered with SEBI. (FII)
• Mutual Funds registered with SEBI. (MF)
• Public Financial Institutions as defined under Section 4A of the Companies

Act, 1956. (DFI)
• Banks, i.e., a banking company as defined under Section 5(1)(c) of the

Banking Regulations Act, 1949. (BNK)
• Insurance companies registered with IRDA. (INS)
2 Retail Professional Clearing Member:
In case of transactions which are to be settled by Retail Professional Clearing

Members (PCM), all the trades with PCM code shall be included in the trading
member’s positions till the same are confirmed by the PCM. Margins shall be
collected from respective trading members until confirmation of trades by PCM.
On confirmation of trades by PCM, such trades will be reduced from the positions of
trading member and included in the positions of PCM. The PCM shall then be liable
to pay margins on the same.
b. ty.
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b. In cases where early pay-in of securities is made prior to the securities pay-in,
such positions for which early pay-in (EPI) of securities is made shall be exempt
from margins. The EPI would be allocated to clients having net deliverable position,
on a random basis. However, members shall ensure to pass on appropriate early pay-
in benefit of margin to the relevant clients
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:
i. Cash
ii. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with
approved Custodians or NSCCL
iii. Bank Guarantee in favour of NSCCL from approved banks in the specified
format.
iv. 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:
i. Cash
40
ii. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited with
approved Custodians or NSCCL
format.
iv. 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.
Additional Base Capital
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:
i. Cash
ii. Fixed Deposit Receipts (FDRs) issued by approved banks and deposited
with approved Custodians or NSCCL
format.
iv. Approved securities in demat form deposited with approved Custodians
Effective Deposits / Liquid Networth
41
Effective deposits
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
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).
Margins
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 SPAN® (Standard Portfolio Analysis of Risk) system for the purpose of
margining, which is a portfolio based system
Initial Margin
NSCCL collects initial margin up-front for all the open positions of a CM based on
the margins computed by NSCCL-SPAN®. A CM is in turn required to collect the
42
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:
a. 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.
b. 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.
Premium Margin
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.
43
Assignment Margin
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.
Margin Reports
The following margin reports are downloaded to members on a daily basis:
• Margin Statement of Clearing Members : MG-09

• Margin Statement of Trading Member/ Custodial Participant : MG-10
• Margin Payable Statement of Clearing Member : MG-11
• Detail Margin File of Clearing Members : MG - 12
• Client Level Margin File of Trading Members : MG-13
Details of Margin Reports
NSCCL SPAN®
The objective of SPAN is to identify overall risk in a portfolio of futures and options
contracts for each member. The system treats futures and options contracts
uniformly, while at the same time recognizing the unique exposures associated with
options portfolios like extremely deep out-of-the-money short positions, inter-month
risk and inter-commodity risk.
44
Because SPAN is used to determine performance bond requirements (margin
requirements), its overriding objective is to determine the largest loss that a portfolio
might reasonably be expected to suffer from one day to the next day.
In standard pricing models, three factors most directly affect the value of an option at
a given point in time:
1. Underlying market price

2. Volatility (variability) of underlying instrument
3. Time to expiration
As these factors change, so too will the value of futures and options maintained
within a portfolio. SPAN constructs scenarios of probable changes in underlying
prices and volatilities in order to identify the largest loss a portfolio might suffer
from one day to the next. It then sets the margin requirement at a level sufficient to
cover this one-day loss.
• Mechanics of SPAN
• Risk Arrays
• Composite Delta
• Calendar Spread or Intra-commodity or Inter-month Risk Charge
• Short Option Minimum Charge
• Net Buy Premium (only for option contracts)
• Computation of Initial Margin - Overall Portfolio Margin Requirement
• Black-Scholes Option Price calculation model
Mechanics of SPAN
The complex calculations (e.g. the pricing of options) in SPAN are executed by the
Clearing Corporation. The results of these calculations are called Risk arrays. Risk
45
arrays, and other necessary data inputs for margin calculation are then provided to
members in a file called the SPAN Risk Parameter file. This file will be provided to
members on a daily basis.
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 would
be performed by NSCCL. SPAN has the ability to estimate risk for combined futures
and options portfolios, and re-value the same under various scenarios of changing
market conditions.
Risk Arrays
The SPAN risk array represents how a specific derivative instrument (for
example, an option on NIFTY index at a specific strike price) will gain or lose value,
from the current point in time to a specific point in time in the near future (typically
it calculates risk over a one day period called the ‘look ahead time’), for a specific
set of market conditions which may occur over this time duration.The specific set of
market conditions evaluated, are called the risk scenarios, and these are defined in
terms of :
(a) how much the price of the underlying instrument is expected to change over one
trading day, and
(b) how much the volatility of that underlying price is expected to change over one
46
trading day.
The results of the calculation for each risk scenario – i.e. the amount by which the
futures and options contracts will gain or lose value over the look-ahead time under
that risk scenario - is called the risk array value for that scenario. The set of risk
array values for each futures and options contract under the full set of risk scenarios
constitutes the Risk Array for that contract.
In the Risk Array, losses are represented as positive values, and gains as negative
values. Risk array values are typically represented in the currency (Indian Rupees) in
which the futures or options contract is denominated.
SPAN further uses a standardized definition of the risk scenarios, defined in terms of
(i) the underlying ‘price scan range’ or probable price change over a one day period,
(ii) and the underlying price ‘volatility scan range’ or probable volatility change of
the underlying over a one day period.
These two values are often simply referred to as the ‘price scan range’ and the
‘volatility scan range’. There are sixteen risk scenarios in the standard definition.
These scenarios are listed as under:
1. Underlying unchanged; volatility up

2. Underlying unchanged; volatility down
3. Underlying up by 1/3 of price scanning range; volatility up
4. Underlying up by 1/3 of price scanning range; volatility down
5. Underlying down by 1/3 of price scanning range; volatility up
6. Underlying down by 1/3 of price scanning range; volatility down
47
15. Underlying up extreme move, double the price scanning range (cover 35% of
loss)
16. Underlying down extreme move, double the price scanning range (cover 35% of
loss)
SPAN uses the risk arrays to scan probable underlying market price changes and
probable volatility changes for all contracts in a portfolio, in order to determine
value gains and losses at the portfolio level. This is the single most important
calculation executed by the system.
As shown above in the sixteen standard risk scenarios, SPAN starts at the last
underlying market settlement price and scans up and down three even intervals of
price changes (‘price scan range’).
At each ‘price scan point’, the program also scans up and down a range of probable
volatility from the underlying market's current volatility (‘volatility scan range’).
SPAN calculates the probable premium value at each price scan point for volatility
up and volatility down scenario. It then compares this probable premium value to the
theoretical premium value (based on last closing value of the underlying) to
determine profit or loss.
Deep-out-of-the-money short options positions pose a special risk identification

problem. As they move towards expiration, they may not be significantly exposed to
"normal" price moves in the underlying. However, unusually large underlying price
changes may cause these options to move into-the-money, thus creating large losses
to the holders of short option positions. In order to account for this possibility, two of
48
the standard risk scenarios in the Risk Array (sr. no. 15 and 16) reflect an "extreme"
underlying price movement, currently defined as double the maximum price scan
range for a given underlying. However, because price changes of these magnitudes
are rare, the system only covers 35% of the resulting losses.
After SPAN has scanned the 16 different scenarios of underlying market price and
volatility changes, it selects the largest loss from among these 16 observations. This
"largest reasonable loss" is the ‘Scanning Risk Charge’ for the portfolio - in other
words, for all futures and options contracts.
Composite Delta
SPAN uses delta information to form spreads between futures and options contracts.
Delta values measure the manner in which a future's or option's value will change in
relation to changes in the value of the underlying instrument. Futures deltas are
always 1.0; options deltas range from -1.0 to +1.0. Moreover, options deltas are
dynamic: a change in value of the underlying instrument will affect not only the
option's price, but also its delta.
In the interest of simplicity, SPAN employs only one delta value per contract, called
the "Composite Delta." It is the weighted average of the deltas associated with each
underlying ‘price scan point’. The weights associated with each ‘price scan point’
are based upon the probability of the associated price movement, with more likely
price changes receiving higher weights and less likely price changes receiving lower
weights. Please note that Composite Delta for an options contract is an estimate of
the contract's delta after the lookahead - in other words, after one trading day has
passed.
Calendar Spread or Intra-commodity or Inter-month Risk Charge
49
As SPAN scans futures prices within a single underlying instrument, it assumes
that price moves correlate perfectly across contract months. Since price moves across
contract months do not generally exhibit perfect correlation, SPAN adds an Calendar
Spread Charge (also called the Inter-month Spread Charge) to the Scanning Risk
Charge associated with each futures and options contract. To put it in a different
way, the Calendar Spread Charge covers the calendar (inter-month etc.) basis risk
that may exist for portfolios containing futures and options with different
expirations.
For each futures and options contract, SPAN identifies the delta associated each
futures and option position, for a contract month. It then forms spreads using these
deltas across contract months. For each spread formed, SPAN assesses a specific
charge per spread which constitutes the Calendar Spread Charge.
The margin for calendar spread shall be calculated on the basis of delta of the
portfolio in each month. Thus a portfolio consisting of a near month option with a
delta of 100 and a far month option with a delta of –100 would bear a spread charge
equivalent to the calendar spread charge for a portfolio which is long 100 near month
futures contract and short 100 far month futures contract.
A calendar spread would be treated as a naked position in the far month contract
three trading days before the near month contract expires.
Short Option Minimum Charge

Short options positions in extremely deep-out-of-the-money strikes may appear to
have little or no risk across the entire scanning range. However, in the event that
underlying market conditions change sufficiently, these options may move into-the-
money, thereby generating large losses for the short positions in these options. To
cover the risks associated with deep-out-of-the-money short options positions, SPAN
assesses a minimum margin for each short option position in the portfolio called the
50
Short Option Minimum charge, which is set by the NSCCL. The Short Option
Minimum charge serves as a minimum charge towards margin requirements for each
short position in an option contract.
For example, suppose that the Short Option Minimum charge is Rs. 50 per short
position. A portfolio containing 20 short options will have a margin requirement of
at least Rs. 1,000, even if the scanning risk charge plus the inter month spread charge
on the position is only Rs. 500.
Net Buy Premium (only for option contracts)

In the above scenario only sell positions are margined and offsetting benefits for buy
positions are given to the extent of long positions in the portfolio by computing the
net option value.
To cover the one day risk on long option positions (for which premium shall be
payable on T+1 day), net buy premium to the extent of the net long options position
value is deducted from the Liquid Networth of the member on a real time basis. This
would be applicable only for trades done on a given day. The Net Buy Premium
margin shall be released towards the Liquid Networth of the member on T+1 day
after the completion of pay-in towards premium settlement.
Computation of Initial Margin - Overall Portfolio Margin Requirement

The total margin requirements for a member for a portfolio of futures and options
contract would be computed as follows:
(i) SPAN will add up the Scanning Risk Charges and the Intracommodity Spread
Charges.
(ii) SPAN will compares this figure (as per i above) to the Short Option Minimum
charge
(iii) It will select the larger of the two values between (i) and (ii)
51
(iv) Total SPAN Margin requirement is equal to SPAN Risk Requirement (as per iii
above), less the ‘net option value’, which is mark to market value of difference in
long option positions and short option positions.
(v) Initial Margin requirement = Total SPAN Margin Requirement + Net Buy
Premium
Black-Scholes Option Price calculation model

The options price for a Call, computed as per the following Black Scholes formula:
C = S * N (d1) - X * e- rt * N (d2)
and the price for a Put is : P = X * e- rt * N (-d2) - S * N (-d1)
where :
d1 = [ln (S / X) + (r + σ2 / 2) * t] / σ * sqrt(t)
d2 = [ln (S / X) + (r - σ2 / 2) * t] / σ * sqrt(t)
= d1 - σ * sqrt(t)
C = price of a call option

P = price of a put option
S = price of the underlying asset
X = Strike price of the option
r = rate of interest
t = time to expiration
σ = volatility of the underlying
N represents a standard normal distribution with mean = 0 and standard deviation =

1
ln represents the natural logarithm of a number. Natural logarithms are based on the
52
constant e (2.71828182845904).
Rate of interest may be the relevant MIBOR rate or such other rate as may be
specified.
SPAN® is a registered trademark of the Chicago Mercantile Exchange, used herein

under License. The Chicago Mercantile Exchange assumes no liability in connection
with the use of SPAN by any person or entity.
Payment of Margins
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 securities.
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 @ 0.07% 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 facility, close out of outstanding positions,
imposing penalties, collecting appropriate deposits, invoking bank guarantees/ fixed
deposit receipts, etc.
Violations
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.
53
• Initial Margin Violation
• Exposure Limit Violation
• Trading Member wise 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
cash deposit by way of cash or bank guarantee or FDR or securities.
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, penalty in case of second and subsequent
violation during the day will be increased by Rs.5000/- for each such instance. (For
example in case of second violation for the day the penalty leviable will be
Rs.10000/-, Rs.15000 for third instance and so on). 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
Market Wide Position Limits for derivative contracts on underlying stocks
At the end of each day the Exchange shall test whether the market wide open interest
for any scrip exceeds 95% of the market wide position limit for that scrip. If so, the
Exchange shall take note of open position of all client/ TMs as at the end of that day
54
in that scrip, and from next day onwards the client/ TMs shall trade only to decrease
their positions through offsetting positions till the normal trading in the scrip is
resumed.
The normal trading in the scrip shall be resumed only after the open outstanding
position comes down to 80% or below of the market wide position limit.
A facility is available on the trading system to display an alert once the open interest
in the futures and options contract in a security exceeds 60% of the market wide
position limits specified for such security. Such alerts are presently displayed at time
intervals of 10 minutes.
At the end of each day during which the ban on fresh positions is in force for any
scrip, when any member or client has increased his existing positions or has created
a new position in that scrip the client/ TMs shall be subject to a penalty of 1% of the
value of increased position subject to a minimum of Rs.5000 and maximum of Rs.1,
00,000. The positions, for this purpose, will be valued at the underlying close price.
The penalty shall be recovered from the clearing member affiliated with such trading
members/clients on a T+1 day basis along with pay-in. The amount of penalty shall
be informed to the clearing member at the end of the day.
Price Scan Range
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 on account of look ahead period as
may be applicable.
The mean impact cost as stipulated by SEBI is calculated on the 15th of each month on a
55
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 detail 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.
Position Limits
Clearing Members are subject to the following exposure / position limits in addition
to initial margins requirements
Exposure Limits Client Margin Reporting
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 by uploading files to the /FAOFTP/F<CODE>/COLAT/UPLD
directory, on the Extranet Server.
56
1. For TMs, the <CODE> specified in the directory is the 5 digit Trading Member
Code allotted by NSCCL (e.g. 09999)
2. For CMs the <CODE> specified in the directory is the 5 digit Primary Member
Code allotted by NSCCL (e.g. 09999 and not M12345 or C23456)
CMs, who do not clear trades for other trading members, need to report only the file
as applicable to TMs and are not required to report the file as applicable to CMs
A return file is generated for all client margin reporting files uploaded by members.
No return files would be generated for the following files:
i) File with wrong naming convention: If the member has provided a file with
naming convention different from that specified above, such files will not be picked
up by Clearing Corporation. They would continue to remain in the extranet directory
FAOFTP/F<TMCODE>/COLAT/UPLD for trading members and
FAOFTP/F<CMCODE>/COLAT/UPLD for clearing members. This shall be treated
as non reporting of client margin.
ii) File with “0” bytes : If a file size is “0” bytes, it will be deleted from the extranet
server and hence not picked up for processing. This shall be treated as non reporting
of client margin.
Formats of files to be submitted by members and return files sent by NSCCL
Due date for Margin Reporting

The cut off day upto which a member may report client margin details to NSCCL is
referred to as the sign off date. It shall be 2 working days after the trade day.
57
Non submission of Client Margin Reporting Files
A penalty of Rs.200/- is charged to the members for each day of wrong reporting/
partial reporting or non reporting of client margin in the prescribed format as
specified above, beyond 2 working days from the trade day.
Short reporting of margins in Client Margin Reporting Files

The following penalty shall be levied in case of short reporting by trading/clearing
member per instance. The amount of penalty shall vary as per the percentage of short
reporting done by members as indicated below:
Percentage of short reporting ( In terms of

Penalty per instance
value )
<1% Nil
>1% but less than or equal to 20% Reprimand Letter
Rs.1000 or 0.10% of the shortage
>20% amount whichever is higher subject
to a maximum of Rs. 1,00,000/-
More Details
Common Errors observed in client margin reporting

The following common errors have been observed in the client margin files uploaded
by members, whereby the files have been rejected/ not accepted by NSCCL.
1. The alphabets in the file name should be capital.

Wrong file name - f_mrg_cm_08022002_01.csv
Correct file name - F_MRG_CM_08022002_01.CSV
58
2. Some members are not putting underscores _ in the file name at the relevant
places.
Wrong file name - FMRGCM0802200201.csv
Correct file name - F_MRG_CM_08022002_01.CSV
3. Some members are putting their own version of the file name.
Wrong file name - F_MRG_TM_F05530_08022002.CSV
Correct file name - F_MRG_TM_08022002_01.CSV
4. Some members are giving 'csv.csv' twice in the file name extension.
Wrong file name - F_MRG_TM_08022002_01.CSV.csv
Correct file name - F_MRG_TM_08022002_01.CSV
5. Members are putting extra commas in each record (each record for a CM file
should have only 6 commas and for a TM file should have only 7 commas).
6. Some member files have been rejected for modified record (reason code 01)
because they may have created the file in MS-EXCEL. In MS-EXCEL, the
date field and client code field gets modified to the default "General" format
and not the format required by NSCCL. Thus the wrong date format may be
DD-MMM-YY while the correct format required is DD-MMM-YYYY.
Similarly, in the client code field, the prefix '0' (zero) may be removed.
Therefore, Members are advised to create the client margin reporting file in
Notepad.
7. However, if members choose to create the file in MS-EXCEL, they are

advised to follow the following steps to ensure that format remains correct:
o Open the file MG 12/ MG 13 in MS-EXCEL using "Delimited"
option, then click on "Next"
o Select the check box "Comma" to indicate the delimiter to be used,

then click on "Next"
o All columns by default have the "General" data format. Members

should highlight the first 2 columns in the file indicating Date and
59
Client/ Member Code. Then click on "Text" to indicate the column
data format is Text for these columns.
o Then click on "Finish"
o The member is thereafter required to append the margin collected

amount in the last column for each record
o Use the "Save As" option to save the file. In this option, for "File
Name" appropriate file name as specified by NSCCL should be given
i.e. F_MRG_CM_DDMMYYYY_01 or
F_MRG_TM_DDMMYYYY_01, as the case may be. In "Save as
type", the member is required to select "CSV (coma delimited)"
option. Then click on "Yes". Thereafter close the file.
o Members are advised to open the file in Notepad or MS-WORD and

once again check that date field is DD-MMM-YYYY and client
codes with prefix of '0' (zero) continue to have the prefix of '0'.
• Trading Memberwise Position Limit

• Client Level Position Limit
• Market Wide Position Limits (for Derivative Contracts on Underlying
Stocks)
• Collateral limit for Trading Members
Data & Reports Download

Margin Reports
The following margin reports are provided on a daily basis:
1. Margin Statement of Clearing Members : MG-09

2. Margin Statement of Trading Member/ Custodial Participant : MG-10
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3. Margin Payable Statement of Clearing Member : MG-11
4. Detail Margin File of Clearing Members : MG - 12
5. Client Level Margin File of Trading Members : MG-13
Margin Statement of Clearing Members: MG-09
This report gives the margin summary for a Clearing Member for the trade date
across all trading members/ custodial participants, clearing through him. The report
gives a break up of Initial Margin and Premium Margin.
Margin Statement of Trading Member/ Custodial Participant : MG-10
This report gives the margin summary for a Trading Member for the trade date
across all his clients. The report gives a break up of Initial Margin and Premium
Margin.
Margin Payable Statement of Clearing Member : MG-11
This report gives the following details for a Clearing Member (i) the break up of
total deposits, (ii) total margin payable for the day, and (iii) the margin amount
payable by the member to NSCCL or the excess amount lying with NSCCL (the
amount to be paid to NSCCL will be a positive number. The excess amount with
NSCCL is given in brackets).
Detail Margin File of Clearing Members : MG - 12
This file provides details of margins payable by trading members who clear and
settle through the CM. The file format is : Date, Trading Member Code, SPAN
margin, Net Buy Premium, Total Margin and Mark to Market Value (2nd line of
defense - different from MTM settlement).
Client Level Margin File of Trading Members: MG-13
This file provides details of margin payable by the clients who have traded through
the TM. The file format is: Date, Client Code, SPAN Margin, Net Buy Premium,
Total Margin and Mark to Market Value (2nd line of defense - different from MTM
settlement).
61
Risk Management AT BSE
Risk Management and Margin System

Nature of Risks
Reduction and Control of Risks
• Know Your Client Scheme
• Database of lost , Stolen , Misplaced Securities

• Client Caution Database
• Verification of shares at members office
• Inspection
Insurance - as Risk Transfer

The Integrated Comprehensive Insurance Policy
Property Insurance Policies
Trade Guarantee Fund
Brokers' Contingency Fund (BCF)
Market Wide Circuit Breakers
Nature of Risks:
The Exchange has been exposed to a large number of risks, which have been
inherently borne by the member brokers for all times. Since the introduction of the
screen based trading the nature of risks to which the members of the Exchange are
exposed to has undergone radical transformation. At the same time the inherent risk
involved with the trading of paper based securities still remains. Though the process
of dematerialization has already begun, till such that it is made compulsory in all
62
scrip’s, the risk of trading in fake/forged shares and instances of loss of shares etc.
will continue to exist. The safe custody of these shares in physical form in the
Exchange as well as in the member brokers offices is of prime importance.
The Risks can be classified as under:
1. Risks associated with Paper Based Trading

o Lost/misplaced securities
o damage to securities
o loss of securities in transit
2. Client Risk
o Client default
o Client absconding
o Fake/ forged/stolen securities introduced by the clients
Reduction and Control of Risks:
As a measure of the pro-active risk control several measures have been initiated by
the Exchange to reduce the risks to which the Exchange and the member brokers are
exposed. In this regard the Exchange has initiated the following measures:
1. Know Your Client Scheme :
Under the procedure the member brokers of the Exchange are compulsory
required to obtain detailed information of clients prior to commencement of
any transactions for new clients. A similar procedure is also to be followed
for existing clients. This information is to be made available to the Exchange
authorities whenever called for. In case the member brokers fails to furnish
the same it is viewed seriously.
63
2. Database of lost , Stolen , Misplaced Securities :
The Exchange maintains a database on all the shares that have been reported
as lost, stolen, duplicate etc. by the Companies / registrars. The information
available through the database is time relevant thus the database is modified
on a regular basis and is downloaded by the members through BOLT on a
weekly basis. This database is also provided to the Clearing House. The
member brokers can thus reduce the instances of delivery of shares that have
been reported by the Company as bad delivery by checking all the deliveries
in their office with the database provided. The Exchange has designed and
developed a software module for the above for the benefit of the members.
The Clearing House also uses the database. At the time of pay-in the
members of the Exchange are required to submit the details of the shares
being deposited in the pay-in in a softcopy in a prescribed format.. These
details are checked against the database and a report is generated in case a
match is found. Such shares are then reported as bad delivery in the
Exchange. Further follow-up is done with the delivering broker and they are
directed to lodge a police complaint against the client introducing the stolen
shares.
3. Client Caution Database :
The Risk Management department in conjunction with the Bad Delivery Cell
of the Exchange, the Exchange has designed and developed a client database.
All member brokers whose clients / sub-brokers have introduced fake /
forged shares are required to lodge a FIR / Police complaint against their
clients and also report the same to the Exchange. The information of such
clients is called for in a prescribed format. As per the scheme the members
have to collect detailed information about the clients. These details are
64
incorporated in the database, which is downloaded to the members, as a
precautionary measure. The member brokers at the time of admitting new
clients can refer to the client caution database for further verification.
4. Verification of shares at members office :
The Risk Management Committee has outlined a process for minimising the
risks arising out of Fake/ forged /stolen shares introduced by the clients of the
member brokers.
As per the procedure outlined issued by the Exchange, in case the transaction
in a script with one particular client in a settlement exceeds Rs. 10 lakh then
the member brokers are required to send the photocopies of the transfer -
deeds and the share certificates to the Company / Registrar for verification of
the material particulars. The members can select a random sample for the
same from the lot. A similar procedure should also be followed in case the
shares worth more than Rs. 10 lakh are received from the Clearing House
during pay-out in one scrip.
The basic idea behind the introduction of this procedure is to prevent Fake/
forged/stolen shares from being introduced in the market. The Exchange
issued a notice outlining the procedure to be followed. The above procedure
is an important Risk Management Tool especially where there exists a large
volume of deliveries. The Risk Management Department acts as a facilitator
in this regard and has written to all "A" group and B1 group companies in
this regard seeking their co-operation.
5. Inspection :
The department is carrying out inspection of the member brokers records as

regards compliance of the risk management procedures.
Insurance - as Risk Transfer
65
The Exchange presently has in place insurance policies to protect itself in the event
of losses on account of fire, damage to computer systems and a comprehensive
policy which covers risks faced by the Exchange, its member brokers and the
Clearing House.
The Integrated Comprehensive Insurance Policy :
It is a unique and the first of its kind of policy in India. This policy insures the risks
pertaining to all the member brokers, the Exchange and the Clearing House. The
policy covers members of cash segment, derivatives segemnt and internet trading.
The policy has been operational for the last five years. The policy period is from July
to June. The current policy for the year 2002-2003, provides a basic cover of Rs.50
million for the various risks faced by the members. An additional cover of Rs.5
million each has also been taken for the Exchange and the Clearing House a to insure
only losses on account of physical damage to securities, theft, etc. Along with the
pro-active risk control measures, this insurance policy will go a long way in
minimising losses incurred by the member brokers, Clearing House and the
Exchnage . The risks covered under the basic cover of the policy are detailed as
below:
• Loss to members on account of Infidelity of employees

• Loss to the member on account of Fake/ Forged/ Stolen shares being
introduced by his client
• Direct Financial loss suffered by the Member broker on account of physical
loss, destruction, theft or damage to securities & cash
• Loss on account of Securities lost in transit
• Loss suffered on account of incomplete transaction
• Loss sustained as Final receiving member on Exchange on account of default
of the introducing members
• Loss on account of Errors & omissions
• Director's & Official's Liability Cover
Property Insurance Policies:
66
a. The Exchange also has Fire A policies insuring the building and the contents
of its property against damage to the building in event of fire and allied
perils. One policy insures the P. J. Towers & Rotunda Building while the
other policy insures the Cama Building.
b. The Exchange also has in place a separate cover for the computers, EPABX
and VSATs. This policy provides for insurance cover against fire, burglary,
theft and transit of the various computer systems, EPABX and VSATs that
are spread throughout the country.
TRADE GUARANTEE FUND:
While approving the proposal of the Exchange for expansion of BOLT terminals to
cities other than Mumbai, SEBI had, interalia, stipulated that the Exchange should
introduce a system of guaranteeing settlement of trades or set up a Clearing
Corporation to ensure that market equilibrium is not disturbed in case of payment
default by the members.
The Exchange has accordingly formulated a scheme to guarantee settlement of

bonafide transactions of members which form part of the settlement system.
The Exchange has constituted a Trade Guarantee Fund with the following objectives:
a. To guarantee settlement of bonafide transactions of members of the

Exchange inter-se which form part of the Stock Exchange settlement system,
so as to ensure timely completion of settlements of contracts and thereby
protect the interest of investors and the members of the Exchange.
b. To inculcate confidence in the minds of secondary market participants
generally and global investors particularly, to attract larger number of
domestic and international players in the capital market.
c. To protect the interest of investors and to promote the development of and
regulation of the secondary market.
The Scheme has come into force with effect from May 12, 1997.
67
The Scheme is managed by the Defaulters' Committee, which is a Standing
Committee constituted by the Exchange, the constitution of which is approved by
SEBI. The declaration of a member, who is unable to meet his settlement dues, as a
defaulter is a pre-condition for invoking the provisions of this Scheme.
The Exchange has contributed an initial sum of Rs.60 crores to the corpus of the
Fund. All active members are required to make an initial contribution of Rs.10,000/-
in cash to the Fund and also contribute Re.0.25 for every Rs.1 lakh of gross turnover
in all the groups of scrips by way of continuous contribution which is debited to their
settlement account in each settlement.
The active members are required to maintain a base minimum capital of Rs.10 lakhs
each with the Exchange. This contribution has also been transferred to the Fund and
has been treated as refundable contribution of members. Each member is also
required to provide to the Fund a bank guarantee of Rs.10 lakhs from a scheduled
commercial or co-operative bank as an additional contribution to the Fund.
Thus, the initial contribution to the TGF of about Rs.170 crores has been contributed
by the Exchange as well as members in the manner discussed above. The total
corpus of the Fund as on August 31, 2001 was Rs.981 crores.
The creation of TGF has eliminated counter party risk so that if a member is declared
a defaulter, other members do not suffer as was the case in the past.
Brokers' Contingency Fund (BCF):
The Exchange has set up a Brokers' Contingency Fund (BCF) with a view :
i. to make temporary refundable advance(s) to the members facing temporary

financial mis-match as a result of which they may not be in a position to meet
their financial obligations to the Exchange in time;
ii. to protect the interest of the investors dealing through members of the
Exchange by ensuring timely completion of settlement; and
iii. to inculcate confidence in the minds of investors regarding safety of bonafide
transactions entered into on the Exchange.
68
The scheme has come into force with effect from July 21, 1997.
The Fund is managed by a Committee comprising of the President, Executive

Director, Vice-President, Honorary Treasurer and three non-elected directors.
The Exchange has contributed a sum of Rs.9.51 crores to the corpus of the Fund. All
the active members are required to make an initial non-refundable contribution of
Rs.1,000/- to the Fund and also contribute Re. 0.125 for every one lakh rupees of
gross turnover by way of continuous contribution which is debited to their settlement
account in each settlement.
The members are eligible to get advance(s) from the Fund upto a maximum of Rs.25
lakhs at the rate of 21% per annum.
The corpus of the fund as on August 31, 2001 was Rs. 31 crores.
Thus, by creation of the BCF, it has been ensured that the settlement cycles at the
Exchange are not affected due to the temporary financial problems faced by the
members. Thus, it is presumed, will help in increasing the credibility of the stock
exchange settlement system.
Market Wide Circuit Breakers:
• It would be noted that earlier Circuit Filters at individual scrip level used to
restrict the excessive movements of indices as well. In the revised scenario,
where there are no Circuit Filters on the scrips forming part of popular
indices like Sensex and Nifty there is a need to contain such excessive market
movements. Therefore, in order to contain large market movements, SEBI
has mandated that the Market Wide Circuit Breakers (MWCB) which at 10-
15-20% of the movements in either BSE Sensex or NSE Nifty whichever is
breached earlier would be applicable. This would provide cooling period to
the market participants and assimilate and re-act to the market movements.
The trading halt on all stock exchanges would take place as under;
69
• In case of a 10% movement of either index, there would be a 1-hour market
halt if the movement takes place before 1:00 p.m. In case the movement takes
place at or after 1 p.m. but before 2:30 p.m. there will be a trading halt for 1/2
hour. In case the movement takes place at or after 2:30 p.m. there will be no
trading halt at the 10% level and the market will continue trading.
• In case of a 15% movement of either index, there will be a 2-hour market halt
if the movement takes place before 1:00 p.m. If the 15% trigger is reached on
or after 1:00 p.m. but before 2 p.m., there will be 1-hour halt. If the 15%
trigger is reached on or after 2:00 p.m. the trading will halt for the remainder
of the day.
• In case of a 20% movement of the either index, the trading will halt for the
remainder of the day.
The above percentage would be translated into absolute points of the Index variation
on a quarterly basis. These absolute points are revised at the end of each quarter
The Market Wide Circuit Breakers at a national level have been introduced in the
Indian markets for the first time. This is on the lines of the system prevailing in the
US markets.
CHAPTER 6
70
FINDINGS, SUGGESTIONS
AND
BIBLIOGRAPHY
FINDINGS
1) The comprehensive study of on “Risk management at Inter-connected stock Exchanges

has been an enlightening experience stressing on the position aspects on security trading.
2) Risk management techniques and tools are effective at stock exchanges after trading
became online
71
3) When trading at ISE and BSE were not inter connected, the risk involved was high due
to information gap, time lags, errors and frauds were too many. Creation of ISE has not
only connected various exchanges but also provided abridge to eliminate the above
problems.
4) Securities exchange board of India has laid some capital adequacy norms, which have
effectively controlling the fraud of trading members.
5) These effective Risk management methods give to investors settlement guarantee.
6) As there is no case failure of settlement and delivery of shares due to these Risk
management techniques.
7) The ORBIT (Online Regional Bourses Inter-connected Trading) and AXIS (Automated
Exchange Integrated Settlement) software developed on the Microsoft NT platform, with
consultancy assistance from Microsoft, are the most contemporary of the trading and
settlement software introduced in the country. These software’s (ORBIT&AXIS) are
working effectively and minimizing the risk.
8) As there is no case on software failure till now (from the introduction)
9) Mark to margin, base minimum capital are insuring the smooth running of stock
exchange.
10) Benefits of the ISE trading system are not adequately popularized to the general public.
11) Securities Exchange Board of India is continuously monitoring the trading members,
bulls and bears.
12) SEBI issues the guidelines to the investors as per changes in the market conditions.
13) The Depository system has reduced the time lag in delivering and settlement of
securities but also supported the cause of providing more liquidity to the security holder,
72
the need for setting up of a depository, paper less trading through online trading system
and settlement became in evitable and unavoidable for the smooth and efficient
functioning of the capital market. This system has proven its worthy ness by increasing in
the settlement will be done with in the day in future is in itself an indication of how great a
boon in this system of Online trading.
14) For efficiency to move beyond the user interface and into the trading process,
consumers need a transparent window to observe the actual flow of orders, the time of
execution and the commission structure are various points in the trading process. In this
regard, institutional rules, regulations and monitoring functions play a significant role in
promoting efficiency and transparency along the value chain in electronic markets. Our
analysis confirms that in the context of online stock markets, the need for such intervention
and oversight it particularly strong.
15) Present settlement system T+2 is very good and it reduces the risk to the investor.
16) Risk management practices insure market integrity.
17) The ISE helps to reduce the risk by providing inter connecting and eliminating
information gaps. How ever since it is software driven, any failures on the World Wide
Web will lead to serious problems.
18) Trades are settled irrespective of default by a member, this is because of effective risk
management techniques.
SUGGESTIONS
As the above study of Risk management in stock exchanges studied at inter connected
stock exchange gives some suggestions/Recommendations. Those are given below.
1) The Risk management techniques that are laid down by the Securities exchange board
of India, are deliberately working. But there should be high capital imposition for the
foreign intuitional investors, so that smooth running of stock exchange functions.
73
2) There should be controlling measures in regard to rumors and false information that
spread in stock market.
3) The hardware and software should be world class so that risk can be minimized to some
extent.
4) Present settlement system T+2 has to be reduced to T+1.
5) ISE should under take on going research to develop newer technologies so that it
remains competitive
6) The sensitivity index is found to be fluctuating very high due to un controllable issues
like FII inflows and outflows as well as recession in the USA. So that ISE should evolve
new methods to protect the investors from such fluctuations.
7) There should be less transaction cost for small investors so that they are encouraged to
participate in the stock market operations.
8) Mark margin, VaR, Margin shortfall should be changed as per the market conditions.
9) Exposure limits are very useful to control the trading members trading, if it is a need, it
should be further raised.
10) By the above study we know that the Risk management techniques that are used by
stock exchanges are working effectively.
11) Margins system should not exempt the foreign intuitional investors
CONCLUSIONS
The conclusions for this project titled” Risk management in stock exchanges” are as
follows.
1. The Risk management in stock exchanges is effective as there is no default case

registered since it became online.
74
2. As the Indian economy is booming, more investors are coming forward to invest in
stock exchange.
3. Securities exchange board of India is playing a crucial role in laying the risk
management techniques, and it protecting the investors’ interests.
4. ISE is continuously taking the necessary steps to protect the investors’ interests.
5. At lastly SECURITIES EXCHANGE BOARD OF INDIA effectively manages the
Risk management in stock exchanges.
BIBLIOGRAPHY
Newspapers:
Economic Times of India
75
Business standard
Business line
Times of India
Web-sites:
www.nseindia.com
www.iseindia.com
www.nsccl.com
www.wikipedia.com
www.bseindia.com
Report: ISE Report
Books
Prasanna Chandra: financial management
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CHAPTER 1

DESIGN OF THE PROJECT

INTRODUCTION TO RISK MANAGEMENT

Risk is a Hazard, a source of danger; a possibility of incurring loss or misfortune;

• Risk is a concept that denotes a potential negative impact to an asset or some

In a resource management setting, environmental risk assessment may be used to

• natural hazards (flooding, landslides),

OBJECTIVES OF THE STUDY:

LIMITATIONS OF THE STUDY:

DATA COLLECTION METHODS:

Increased activity in trade and commerce during the

Under the Securities Contract Regulation Act of 1956, securities’

Aids in financing the Industry: A continuous market for shares provides a

Dissemination of Information: Stock Exchanges provide information through

REGULATORY FRAME WORK

Ministry of finance: The Stock Exchange division of the Ministry of Finance

The Securities and Exchange Board of India

The Governing body of the Stock Exchange consists of 13 members of which

The National Stock Exchange (NSE) of India became operational in

The National system provides single, nation wide Securities. It enables

SALIENT FEATURES OF ISE

Robust Operational Systems:

Skilled and experienced manpower:

Trading, Risk Management and Settlement Software Systems:

TRADING PROCEDURE BEFORE ON-LINE

THE TRADING RING:

INTODUCTION TO ONLINE TRADING

Easier transaction processing.

CLEARING & SETTLEMENT TRADING MECHANISM

Movement of securities has become almost instantaneous in the dematerialized

Risk Management in NSE

Margins collection from Client

Exemption upon delivery of securities

Categorization of stocks for imposition of margins

• The remaining stocks shall be classified into Group III.

• Categorisation of newly listed securities

Daily margins payable by members consists of the following:

1. Value at Risk Margin

VaR margin rate for a security constitutes the following:

The VaR margin so collected shall be released on completion of pay-in of the

Extreme Loss Margin

The MTM margin shall also be collected/adjusted from/against the cash/cash

The MTM margin so collected shall be released on completion of pay-in of the

Margins collection from Client

Members should have a prudent system of risk management to protect themselves

In case of any shortfall in margin:

• The members shall not be permitted to trade with immediate effect.

• Penalty for margin violation

2. Other Liquid assets:

Exemption for institutional deals

Institutional businesses i.e., transactions done by all institutional investors shall be

• Foreign Institutional Investors registered with SEBI. (FII)

• Mutual Funds registered with SEBI. (MF)

• Public Financial Institutions as defined under Section 4A of the Companies

• Banks, i.e., a banking company as defined under Section 5(1)(c) of the

• Insurance companies registered with IRDA. (INS)

• Transactions entered into on behalf of custodial participants i.e. carrying

• Non-Custodial Institutional Transactions shall be identified by the use of the

• Reporting and other procedures regarding ‘NCIT’ and Institution transactions

Exemption upon delivery of securities

Other Liquid assets:

a. Liquid (Group I) Equity Shares in demat form, as specified by NSCCL from