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Chapter 7 Risk Containment Measures
After reading this chapter, you should be able:
1. To recall the knowledge related to capital adequacy requirements under various segments.
2. To classify among the various types of margins.
3. To acquire practical aspects related to margin system.
4. To apply the knowledge of exposure limits in the real life situation and trade accordingly.
Your guide engine to learning:
7.2 Capital Adequacy Requirement
7.3 Base Minimum Capital (BMC) and Additional Base Capital (ABC)
7.4 Trading and Exposure Limits
7.4.1 Determination of Gross Exposure
7.4.2 Early Pay-in of Funds/Securities
7.4.3 On line Exposure Monitoring
7.4.4 Violation of Exposure Limits
7.5 Grouping of Securities
7.6 Margin Requirements
7.6.1 Value at Risk Margin
7.6.2 Mark to Market Margin
7.6.3 Extreme Loss Margin
7.6.4 Margin Payment and Payout
7.6.5 Margin Shortfall
7.7 Settlement Guarantee
7.8 Penalty Points and Penal Interest
7.9 Indemnity Insurance
7.10 Inspection and Investigation
7.11 Investor Protection Fund (IPF)
7.12 No-delivery Period
As we have already discussed in the previous chapter that all the trades are settled by next two working days after the trading day. The obligations are downloaded by the members on time so that they make available the required funds and securities when required. On T+2 day, the funds and securities are paid in by 11:00 am by the members/CM to the NSCCL and the resources are paid out to the CM by the NSCCL at or after 1.30 pm.
The CC has also given the option of direct pay-out to investors, where in the CC credits the clients demat account with the securities that he is to receive. The details are furnished by the member of the respective client. In case the client has not paid fully to the member w.r.t the securities bought, the member can with hold the details of his account so that the member receives the securities in his pool account. In case of short deliveries, NSCCL buys securities on behalf of the defaulter from the auction market on T+3 day.
The auction market starts at 12 noon. From 12 noon to 12.30 pm, the initiator (i.e. NSCCL) puts the buy orders and the solicitors put the sell orders. Once the orders get matched, the CC buys the shares in order to settle the trade. In case the shares have still not been bought out, the CC compulsorily closes out the transaction by paying to the buyer for the shares not bought out.
To avoid such situations of default, the CC has put some statutory requirements with reference to capital adequacy and exposure limits. Since the CC doesn’t want to run into the risk of buying from the auction market or going for compulsory close outs, it has fixed certain norms. The capital adequacy requirements in case of NSE are much higher than the rest of the stock exchanges in India.
7.2 Capital Adequacy Requirement
To become a member of the stock exchange on NSE, one needs to have certain amount of funds as minimum net worth. They also have to give some amount as interest free deposit to the CC. The table below gives the details of capital adequacy requirements for membership under NSE.
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