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Computation of Initial Margin |
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ICCL has adopted the Standard Portfolio Analysis of Risk (“SPAN”) methodology for the purpose of real time risk management.
The Initial Margin requirement is based on a worst scenario loss of a portfolio of an individual client comprising his positions in all the options and futures contracts across various scenarios of price and volatility changes. The Initial Margin requirements shall be set to provide coverage of at least a 99% single-tailed confidence interval of the estimated distribution of future exposure over two days’ time horizon.
The client-wise margins would be grossed across various clients at the Trading / Clearing Member level. The proprietary positions of the Trading / Clearing Member would be treated as that of a client (net basis).
The margins levied to members shall be levied and collected in INR.
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| b |
Portfolio Based Margining |
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The parameters involved in a portfolio-based margining approach include-
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| I. |
Worst Scenario Loss |
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The worst-case loss of a portfolio is calculated by valuing the portfolio under several scenarios of changes in the price and volatility. The scenarios to be used for this purpose would be: |
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| Risk Scenario Number |
Price Move in Multiples of Price Range |
Volatility Move in Multiples of Volatility Range |
Fraction of Loss to be Considered |
| 1 |
0 |
+1 |
100% |
| 2 |
0 |
-1 |
100% |
| 3 |
+1/3 |
+1 |
100% |
| 4 |
+1/3 |
-1 |
100% |
| 5 |
-1/3 |
+1 |
100% |
| 6 |
-1/3 |
-1 |
100% |
| 7 |
+2/3 |
+1 |
100% |
| 8 |
+2/3 |
-1 |
100% |
| 9 |
-2/3 |
+1 |
100% |
| 10 |
-2/3 |
-1 |
100% |
| 11 |
+1 |
+1 |
100% |
| 12 |
+1 |
-1 |
100% |
| 13 |
-1 |
+1 |
100% |
| 14 |
-1 |
-1 |
100% |
| 15 |
+2 |
0 |
35% |
| 16 |
-2 |
0 |
35% |
The probable premium value at each price scan point for volatility up and volatility down scenarios is calculated and then compared to the theoretical premium value (based on last closing value of the underlying) to determine profit or loss.
The Black-Scholes option pricing model is used for the purpose of calculation of probable/theoretical option values.
The maximum loss under any of the scenario (considering only 35% of the loss in case of scenarios 15 and 16) is referred to as the Worst Scenario Loss.
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| II. |
Volatility |
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The standard deviation (volatility estimate) is computed using the Exponentially Weighted Moving Average method (“EWMA”).
The estimate at the end of time period t (σt) is estimated using the volatility estimate at the end of the previous time period. i.e. as at the end of t-1 time period (σt-1), and the return (rt) observed in the futures market during the time period t.
The volatility estimated at the end of the day’s trading is used in calculating the initial margin calls at the end of the same day.
The formula is as under:
Where:
- λ is a parameter which determines how rapidly volatility estimates changes. The value of λ is currently fixed at 0.995.
- σ (sigma) means the standard deviation of daily returns in the futures market.
- r (return) is defined as the logarithmic return: rt = ln (Ft/Ft-1) where Ft is the price of the Index/ Single Stock Future at time t.
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| III. |
Volatility Scan Range |
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The Volatility Scan Range (“VSR”) is the amount by which the implied volatility is changed in each risk array scenario. The VSR is referred to in percentage terms.
The VSR for is derived as the maximum of:
- 25% of annualized EWMA Volatility
and
- Minimum VSR%
| Product |
VSR Factor |
Minimum VSR |
| Index Derivatives |
25% |
4% |
| Single Stock Derivatives |
25% |
10% |
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| IV. |
Price Scan Range |
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The Price Scan Range ("PSR") is the probable price change over two days period. PSR would be specified by ICCL from time to time. The PSR parameter is referred to in standard deviation/ sigma (σ) terms.
| Sr. No. |
Particulars |
Price Scan Range |
| 1 |
Index Products |
Higher of: |
PSR Sigma scaled up by square root of MPOR of 2 days |
6 sigma x 1.414 |
| Minimum Initial Margin scaled up by square root of MPOR of 2 days |
9.30% |
| 2 |
Stock Products |
Higher of: |
PSR Sigma scaled up by square root of MPOR of 2 days |
6 sigma x 1.414 |
| Minimum Initial Margin scaled up by square root of MPOR of 2 days |
14.20% |
- In case of index option contracts with residual maturity of more than 9 months, the price scan range shall be based on 6σ, scaled up by square root of MPOR 2 days subject to at least 17.7% of the underlying price after considering scaling up.
- In single stock derivatives the price scan range shall be further scaled up by square of MPOR of 3 days, if the impact cost of the security (as used for categorization of securities for margining in Cash Market) is greater than 1%.
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V. Initial Margin Requirement |
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The Initial Margin Requirement is computed as follows:
| Initial Margin Requirement |
= |
Maximum of: |
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Net Option Value |
| Scan Risk |
| Inter Commodity Credit |
| Intra Commodity Charge |
| Short Option Minimum |
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There is no separate short option minimum charge apart from the margin parameters specified. |
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ICCL provides calendar spread margin benefit wherein a position in one expiry is hedged by an offsetting position in a different maturity of the same underlying
The margin for options is calculated based on delta of the portfolio in each month. A portfolio consisting of a near month option with a delta of 100 and a far month option with a delta of –100 bears a spread charge equal to the spread charge for a portfolio which is long 100 near month futures and short 100 far month futures. Portfolio pertains to a portfolio consisting of futures and /or options contract on a particular underlying. Option positions of different expiry, irrespective of their strike prices, shall also attract calendar spread margin.
The benefit for a calendar spread continues till expiry of the near month contract. The calendar-spread margin is charged in addition to the worst-scenario loss of the portfolio.
| Product |
Calendar Spread Margin |
| Index Derivatives |
1.75% of the far month contract |
| Single Stock Derivatives |
2.20% of the far month contract |
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The Net Option Value (“NOV”) is the current market value of the option times the number of options (positive for long options and negative for short options) in the portfolio. The Net Option Value would be added to the Liquid Net Worth of the clearing member i.e. the value of short options will be deducted from the liquid net worth and the value of long options will be added thereto.
Thus mark-to-market gains and losses on option positions are adjusted against the available liquid net worth of the Clearing Member. Since the options are premium style, there will be no mark-to-market settlement of profit or loss.
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Extreme Loss Margin (“ELM”) is applicable on the gross notional value of the open positions in addition to the other margins on a real time basis. It is deducted from the liquid assets of the clearing member on an online, real time basis.
The Extreme Loss Margin rates are as under:
| Sr. No |
Particulars |
Extreme Loss Margin |
| Index Future |
Index Option |
| 1 |
Minimum ELM |
2.00% |
2.00% |
| 2 |
OTM ELM (OTM by more than 10%) |
N/A |
3.00% |
| 3 |
Residual Maturity (Maturity > 9 months) |
N/A |
5.00% |
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Stock Future |
Stock Option |
| 1 |
Minimum ELM |
3.50% |
3.50% |
| 2 |
OTM ELM (OTM by more than 30%) |
N/A |
5.25% |
| 3 |
Residual Maturity (Maturity > 9 months) |
N/A |
N/A |
- Extreme Loss Margin is applicable only on futures and short option positions and is not applicable on long option positions.
- The notional value is be computed using the latest futures price for futures contracts and last available closing price of the underlying for the options contracts.
- In case of calendar spread positions in futures contracts, extreme loss margin is levied on one third of the value of the open position of the far month futures contract.
- In case of index options contracts that are deep out of the money (OTM) (i.e. strikes out of the money by more than 10% from the previous day closing underlying price) the applicable Extreme Loss Margin will be 3%.
- In case of index option contracts with residual maturity of more than 9 months, the applicable Extreme Loss Margin will be 5%.
- In case of single stock options contracts that are deep out of the money (i.e. strikes out of the money by more than 30% from the previous day closing underlying price)
the applicable Extreme Loss Margin will be 5.25%.
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Intraday Current Exposure Margin
Payable crystalized obligations based on the closed-out futures positions and payable/receivable premium at client level.
On intraday basis the net payable/receivable amount at client level shall be calculated using:
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Premium payable/receivable
- Futures crystallized Profit or Loss (calculated based on weighted average prices of trades executed).
If the overall amount at client level is payable, such amount shall be the intraday Current Exposure Margin (“CEM”) for the client.
CEM Example
| Particulars |
Premium Payable (+) /Receivable(-) |
Crystallised Loss (+) /Profit (-) |
Current Exposure Margin |
| Client 1 |
-20 |
-90 |
0 |
| Client 2 |
50 |
30 |
80 |
| Client 3 |
0 |
0 |
0 |
| Client 4 |
-30 |
80 |
50 |
| Client 5 |
30 |
-80 |
0 |
| Client 6 |
-100 |
80 |
0 |
| Client 7 |
100 |
-80 |
20 |
iv End – of - day basis
Payable obligations at client level considering all futures and options positions.
At the end of day, the payable/receivable amount at client level will be calculated using:
- Futures mark to market profit/loss to be settled
- Options premium payable/receivable
- Options exercise/assignment for expired contracts
- Futures final settlement for expired contracts
If the overall amount at client level is payable, such amount will be the end -of- day consolidated crystallized obligation margin for the client. The margin on consolidated crystallized obligations will replace the net buy premium, intraday crystallized losses, assignment margin and futures final settlement margin levied currently. The margin on consolidated crystallized obligations will be released on completion of settlement.
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The cross-margining benefit across Equity Cash segment and Equity Derivatives segments is provided to all categories of market participants.
i Positions eligible for cross-margin benefit:
- Index futures position and constituent stock futures position in derivatives segment
- Index futures position in derivatives segment and constituent stock position in cash
- Stock futures position in derivatives segment and the position in the corresponding underlying in cash segment
A basket of positions in index constituent stock/stock futures, which is a complete replica of the index in the ratio specified by BSE/ICCL, is eligible for cross margining benefit. The number of units is changed only in case of change in share capital of the constituent stock due to corporate action or issue of additional share capital or change in the constituents of the index.
A spread margin of 25% of the total applicable margin on the eligible off-setting positions, as mentioned above, is levied in the respective cash and derivative segments.
ii Positions eligible for cross-margin benefit for correlated indices:
Cross margin benefit shall be provided on off-setting positions in futures on equity indices pairs which satisfies the eligibility criteria. The positions in the derivatives segment for the stock futures and index futures shall be in the same expiry month to be eligible for cross margining benefit.
A spread margin of 30% of the total applicable margins on the eligible off-setting positions in futures on equity indices pairs.
iii Computation of cross margin:
- To avail Cross Margin Benefit it should be registered clients with ICCL and client's CM should be clearing with ICCL for both Cash and Derivatives segments
- The positions which are eligible for offset, shall be subject to spread margins.
- The difference in the margins on the total portfolio and on the portfolio excluding offsetting positions considered for cross margining, less the spread margins shall be considered as cross margining benefit.
- Cross margining benefit is computed at client level on an online real time basis and provided to the trading member / clearing member / custodian, as the case may be, who, in turn, pass on the benefit to the client.
- For institutional investors the positions in Capital market segment is considered only after confirmation by the custodian on T+1 basis and on confirmation by the clearing member in Derivatives segment.
- While reckoning the offsetting positions in the Capital market segment, positions in respect of which margin benefit has been given on account of early pay-in of securities or funds is not be considered.
- Positions in option contracts is not considered for cross margining benefit.
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- For securities with Intra-day (High -Low) price movement of more than 10% in the underlying market for 3 or more days in last one month, the minimum total margins (SPAN margins, Extreme Loss Margin and Additional margin) shall be equal to the maximum intraday price movement of the security observed in underlying market in last one month. The same shall be continued till expiry date of derivative contracts which falls after completion of three months from date of levy.
- For securities with Intra-day (High -Low) price movement of more than 10% in the underlying market for 10 or more days in last six months; the minimum total margins (SPAN margins, Extreme Loss Margin and Additional margin) shall be equal to the maximum intraday price movement of the security observed in underlying market in last six months. The same shall be continued till expiry date of derivative contracts which falls after completion of one year from date of levy
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In addition to the above-mentioned margins, ICCL shall levy Pre-expiry margin on lower of potential deliverable positions or in-the-money long option positions five (5) working days prior to expiry (including expiry day) of derivative contract which shall be settled through delivery.
Example- If expiry of derivative contract is on Thursday, the pre-expiry margins on potential in-the-money long option position shall be applicable from previous Friday BOD.
From Expiry - 4 day BOD client level potential in-the-money long option positions are computed on daily basis. In-the-Money options is identified based on the Settlement price of the security in the underlying Equity Cash segment on the respective day.
The marginable positions are also valued at underlying settlement price.
Pre-expiry margins at the client level is computed as per the margin rate applicable in Equity Cash segment (i.e VAR, Extreme Loss Margins and Additional margin, if any) of the respective security.
The said margin is levied at client level and collected from clearing member in a staggered manner as under:
- 10% of Pre-expiry margins computed on Expiry - 4
- 25% of Pre-expiry margins computed on Expiry - 3
- 45% of Pre-expiry margins computed on Expiry - 2
- 70% of Pre-expiry margins computed on Expiry – 1
- 100% of Pre-expiry margins computed on Expiry day
The delivery margins on potential in-the-money long option positions are recomputed only at EOD basis considering the revised position and underlying settlement prices. |
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Post expiry of stock derivative contracts, margins (i.e., VaR, Extreme Loss Margin, Additional margin, MTM) as applicable in Equity Cash Segment are applicable and levied as delivery margin on the positions which are converted to delivery settlement till the settlement of delivery obligation.
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ICCL provides margin benefit on total margins in the Equity Cash Segment and the Delivery Margin in Equity Derivatives Segment for positions which are settled on a net basis across the Equity Cash and Equity Derivatives Segment upon expiry of stock derivatives.
The margin benefit is provided to the extent of offsetting position of open interest in stock derivatives devolving into delivery and the obligations in the underlying Equity Cash Segment.
Offsetting positions should be in the same ISIN-CM-TM-Client (UCC) combination across the Equity Cash and Equity Derivatives segment.
Any margins on the balance positions (post netting), shall continue to be applicable in the respective segment. |
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The ICCL SPAN risk management parameters shall be updated at:
- Beginning-of-Day
- 11:00 a.m.
- 12:30 p.m.
- 02:00 p.m.
- 03:30 p.m.
- End-of-Day
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The entry and exit threshold for the Risk Reduction Mode (“RRM”) is detailed below:
- Clearing Members: Put in RRM at 90% collateral utilisation & moved back to normal mode when utilisation goes below 85%.
- Trading Members: Put on RRM at 90% utilisation of trading
limit assigned by their Clearing Members & moved back to normal
mode when limit utilisation goes below 85%.
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Aforesaid margins are computed at a client level portfolio and grossed across all clients (including the proprietary positions of member) at the member level. Margins are collected/adjusted upfront from the liquid assets of the Clearing Members on an on-line real time basis.
Members are required to collect initial margins, exposure margins, calendar spread margins and mark to market settlements and report details of such margins collected from their client/constituents to ICCL.
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Clearing members shall provide for margin in any one or more of the eligible collateral modes as specified by ICCL. The margins shall be collected/adjusted from the liquid assets of the member on a real time basis.
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Premium is settled in INR and paid in by the buyer in cash and paid out to the seller in cash on T+1 day. Until the buyer pays in the premium, the premium due is deducted from the available liquid assets on a real time basis.
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