RISK MANAGEMENT
NSCCL has developed a comprehensive risk containment mechanism for the Futures and Options segment. The salient features of risk containment mechanism on the Futures and options segment are:
- The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent.
- NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the initial margin requirementsfof eachfutures/options contract on a daily basis. It also follows value-at-risk based margining through SPAN. The CM in turn collects the initial margin from the TMs of their respective clients.
- The open positions of the members are marked to NSCCL. Market based on the contract settlement price for each contract. The difference is settled in cash onT+1 basis.
- NSCCL ‘s online position monitoring system monitors a CM’s open positions on a real time basis. Limits are set for each CM based on his capital deposits. The on line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for MTM value violation, while TMs are monitored for contract wise position limit violation.
- CMs are provided a trading terminal for the purpose of monitoring the open positions of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the infra day exposure limits set up by a CM and whenever a TM exceed the limits, it stops that particular TM from further trading.
- A Member is alerted of his position to enable him to adjust his exposure or bring in additional capital. Position violations result in withdrawal of trading facility for all TMs of a CM in case of a violation by the CM. ‘
- A separate settlement guarantee fund for this segment has been created out of the capital of members.
The most critical component of risk containment mechanism for Futures and Options segment is the marginalizing system and online position monitoring. The actual position monitoring and margining is carried out online through Parallel Risk Management system (PRISM). PRISM uses SPAN(r) (Standard Portfolio Analysis of Risk) system for the purpose of computation of online margins, based on the parameters defined by SEBI.
NSCCL – SPAN
The objective of NSCCL – SPAN is to identify overall risk in a portfolio of all futures and options contracts for each member. The system treats futures andoptions contracts uniformly, while at the same time recognizing the unique exposures associated with options portfolios, like extremely deep OUT OF THE MONEY short positions and inter month risk. Its over riding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day based on 99% VaR methodology. SPAN considers uniqueness of option portfolios. The following factors affect the value of an option.
- UNDERLYING MARKET PRICE.
- STRIKE PRICE.TIME TO EXPIRATION.
- VOLATILITY (VARIABILITY) OF UNDERLYING INSTRUMENT.
- INTEREST RATE.
As these factors change, the value of options maintained within a portfolio also changes. Thus, SPAN constructs scenarios of probable changes in underlying prices and volatilities in order to identify the largest loss a portfolio might suffer from one day to the next.
It then sets the Margin requirement to cover this one-day loss. The complex calculations (e.g., the pricing of options) in SPAN are executed by NSCCL. The results of these calculations are called risk arrays. Risk arrays, and other necessary data inputs for margin calculation are provided to members daily in a file called the SPAN risk parameter file. .
Members can apply the data contained in the risk parameter files, to their specific portfolios of futures and options contracts, to determine their SPAN margin requirements. Hence, members need not execute complex option pricing calculations, which is performed by NSCCL. SPAN has the ability to estimate risk for combined futures and options portfolios, and also revalue the same under various scenarios of changing market conditions.
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