The Securities and Exchange Board of India is set to implement "value at risk" margins in the cash segment from March 1, 2004. Currently, the exchanges levy margins at a flat rate, which is, however, reset almost every week.
The revised margins will be collected upfront, at the time of the trade itself, instead of the day immediately following the trade.
| A new regime |
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Value at risk (VaR) is a measure of potential risk (loss) VaR depends of volatility and liquidity in a stock VaR is dynamic, changes from day to day Stock volatility will lead to higher margins the next day Brokers have to pay VaR margins before executing trades |
These margins will be collected and adjusted against the additional capital or collateral deposited by the broker-members as cash, securities or other liquid assets.
Value at risk measures the maximum loss a broker can face in a scrip and is a function of its volatility and liquidity.
This varies every day, and at present ranges between 5 per cent and 65 per cent. Currently, such margins are levied in the derivatives segment but are implemented on the T+1 (next day) cycle.
The move is seen as a major blow to the stockbroking community as it is expected to suck out the extra liquidity from the market and increase the cost of working capital for brokers. Most clients are unlikely to give upfront margins to the brokers.
Since all trades cannot be fully provided for, brokers will have no option but to put up surplus margins with the exchanges to be on the safe side. This will mean increased liabilities. The brokers' and clients' ability to leverage will be considerably lessened.
Dharmesh Mehta, head of stockbroking in Enam Securities, said the measure would ensure the safety of the market as a whole since "it is a better risk management measure".
The value at risk margin is charged on the net outstanding position -- the difference between the buy and sell values -- of the respective clients on their securities across all open settlements.
The net position at the client level for a member is arrived at and thereafter grossed across all clients to compute the gross exposure for margin calculation.