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Risk Management In Derivatives EQUITY DERIVATIVES Stock Futures A portfolio based margining model is adopted by BSE which takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on Derivatives Segment. The parameters for such a model are as follows:
I)Initial Margin or Worst Case Scenario Loss: The initial Margin requirement is based on the worst-case loss of portfolio at client level to cover 99% VaR over one day horizon. The initial margin requirement is net at the client level and is on a gross basis at the Trading/Clearing Member level. The initial margin requirement for the proprietary position of Trading / Clearing Members is also on net basis. a) Worst Scenario Loss The worst-case loss of a portfolio is calculated by valuing the portfolio under several scenarios of changes in the respective stock prices. The scenarios to be used for this purpose are:
The price scan range is taken at three and a half standard deviations (3.5s ) where s is daily volatility of respective underlying stock. The price scan range shall be linked to liquidity, measured in terms of impact cost for an order size of Rs.5 lakhs, calculated on the basis of order book snapshots in the previous six months. Accordingly, if the mean value of impact cost exceeds 1%, the price scanning range is scaled up by square root of three. This is in addition to the requirement of scaling up for the look-ahead period i.e. the time in which mark to market margin is collected. However, the Derivatives Segment may specify a higher price scan range than the said 3.5s values for better risk management. To cover a 99% VaR over 'T' day’s horizon, the price scan range is based on 3.5s Ö T where T is number of days. The computation of risk arrays for various stock future contracts is done only at discrete time points each day and the latest available risk arrays is applied to the portfolios on a real time basis. The risk arrays is updated 5 times in a day taking the closing price of the previous day at the start of trading and taking the last available traded prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., and at the end of the trading session taking closing price of the day. b) Minimum Margin The minimum initial margin equal to 7.5% of the notional value of the contract based on the last available price of the futures contract is applied at all times. To achieve the same, the price scan range is adjusted to ensure that the minimum margin collected doesn’t fall below 7.5% at any time. The Minimum Initial Margin for Stock Futures Contract shall further be scaled up by square root of three in respect of stocks which have a mean value of impact cost of more than 1%. This would be in addition to the look ahead period. c) Calendar Spread The margin on calendar spread is calculated and benefit is given to the Members for such position. The calendar-spread margin is charged in addition to worst-scenario loss of the portfolio. A calendar spread is treated as a naked position in the far month contract as the near month contract approaches expiry. A calendar spread will be treated as naked positions in the far month contract three trading days before the near month contract expires. The margin on calendar spread is calculated on the basis of delta of the portfolio consisting of futures and option contracts in each month. Thus, a portfolio consisting of a near month contract with a delta of 100 and a far month contract with a delta of –100 will attract a spread charge equal to the spread charge for a portfolio, which is long 100 near month futures and short 100 far month futures. The spread charge is specified as 0.5% per month for the difference between the two legs of the spread subject to minimum 1% and maximum 3% as specified in the J. R. Varma Committee report. While calculating the spread charge, the last available closing price of the far month contract is used to determine the spread charge. II) Exposure Limits/Second Line of Defense In case of stock futures contracts, the notional value of gross open positions at any point in time should not exceed 20 times the available liquid networth of a Member, i.e. 5% of the notional value of gross open position in single stock futures or 1.5s of the notional value of gross open position in single stock futures, whichever is higher, would be collected / adjusted from the liquid networth of a Member on a real time basis.
This is calculated as follows:
Last available closing price of the future series * No. of Market lots * x %. Where "x%" is the higher of 5% or 1.5s . For the purpose of computing 1.5s , the s of daily logarithmic returns of prices in the underlying stock in the cash market in the last six months shall be computed. This value shall be applicable for a month and shall be re-calculated at the end of the month by once again taking the price data on a rolling basis for the past six months. However, BSE may specify higher exposure margin for better risk management. In case of a calendar spread contracts, the calendar spread is regarded as an open position of one third (1/3rd) of the far month contract. As the near month contract approaches expiry, the spread shall be treated as a naked position in the far month contract three days prior to the expiry of the near month contract.
III) Mark-to-Market Margin The clients’ positions are marked-to-market on a daily basis at the portfolio level. However, for payment of mark-to-market margin to BSE, the same are netted out at the Member level. a) Collection / Payment : The mark-to-market margin is paid in / out in cash on T+1 day. b) Methodology for calculating Closing Price for mark-to-market: The daily closing price of the stock futures contract for mark-to-market settlement is arrived at using the following algorithm:
The theoretical price is arrived at using following algorithm:
The Bank Rate + 1% would be taken as risk free interest rate percentage and dividend yield is taken as zero for simplicity.
IV) Final Settlement On the expiry of a stock futures contract, the contract is settled in cash at the final settlement price. However, the profit /loss is paid in /paid out in cash on T+1 basis. The final settlement price of the expiring futures contract is taken as the closing price of the underlying stock. The following algorithm is presently being used for calculating closing value of the underlying scrips (including other scrips) in the Cash Segment of BSE:
V) Position Limits a) Market Level A market wide limit on the open position (in terms of the number of underlying stock) on stock options and futures contract of a particular underlying stock is 20% of the number of shares held by non-promoters i.e. 20% of the free float, in terms of number of shares of a company. The limit would be applicable on all open positions in all futures and option contracts on a particular underlying stock. The Market Wide limit is enforced in the following manner: At the end of the day, BSE tests whether the market wide-open interest for any scrip exceeds 95% of the market wide position limit for that scrip. If so, BSE takes note of open position of all client/Trading Members as at the end of that day in that scrip and from next day onwards the Members / clients are required to trade only to decrease their positions through offsetting positions. Though the action is taken only at the end of the day, the real time information about the market wide-open interest as a percentage of the market wide position limits is disclosed to the market participants. At the end of each day during which the ban on fresh positions is in force for any scrip, BSE tests whether any member or client has increased his existing positions, or has created a new position in that scrip. If so, the client shall be subject to a penalty equal to a specified % of the increase in the position. The penalty is recovered along with the Mark-to-Market on the next day. The normal trading in the scrip is resumed after the open outstanding position comes down to 80% or below of the market wide position limit. b) Trading Member Level For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower. For stocks having applicable market wide position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit would be 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crores whichever is lower. Once a Member reaches the position limit in a particular underlying, he is permitted to take only offsetting positions (which results in lowering the open position of the member) in derivative contracts on that underlying. The position limit at trading Member level is computed on a gross basis across all clients of the trading Member. c) Client Level The client's gross open position across all derivative contracts on a particular underlying shall not exceed higher of- 1% of the free float market capitalization (in terms of number of shares) or 5% of the open interest in the underlying stock (in terms of number of shares). The position is applicable on the combined positions in all derivatives contracts on an underlying stock. Members are advised to disclose the position of the clients in case the client crosses the aforesaid limits. Members are also advised to inform their clients about the disclosure requirement to BSE on part of the client. d) FII Level For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower. For stocks having applicable market wise position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit would be 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crores whichever is lower. e) Sub Account Level Each sub-account of a FII would have the following position limits: The gross open position across all derivative contracts on a particular underlying stock of a sub-account of a FII should not exceed the higher of: 1% of the free float market capitalisation (in terms of number of shares). or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). This position limits would be applicable on the combined position in all derivative contracts on an underlying stock at an exchange. f) NRI Level For stock option and single stock futures contracts, the gross open position across all derivative contracts on a particular underlying stock of a NRI shall not exceed the higher of:
1% of the free float market capitalization (in terms of number of shares). or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). This position limits would be applicable on the combined position in all derivative contracts on an underlying stock at an exchange. g) Mutual Fund Level For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower. For stocks having applicable market wide position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit would be 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crores whichever is lower. h) Limits of each scheme of Mutual Fund For Stock Futures and Option Contracts, the gross open position across all derivative contracts on a particular underlying stock of a scheme of mutual fund shall not exceed the higher of: 1% of the free float market capitalisation (in terms of number of shares) or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts) This position limits is applicable on the combined position in all derivative contracts on an underlying stock. STOCK OPTIONS A portfolio based margining model is adopted which will take an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on Derivatives Segment. The parameters for such a model are as follows:
I) Initial Margin or Worst Case Scenario Loss: The initial Margin requirement is based on the worst-case loss of portfolio at client level to cover 99% VaR over one day horizon. The initial margin requirement is net at the client level and is on a gross basis at the Trading/Clearing Member level. The initial margin requirement for the proprietary position of Trading / Clearing Member is also on net basis. The initial margin (or the worst scenario loss) is adjusted against the available liquid net worth of the Member. The Members in turn will collect the initial margin from their clients on an up front basis. a) Worst Scenario Loss The worst-case loss of a portfolio is calculated by valuing the portfolio under several scenarios of changes in the underlying stock price and also the changes in the volatility of the underlying stocks. The scenarios to be used for this purpose are:
The price scan range is taken at three and a half standard deviations (3.5s ) where s is daily volatility of respective stocks. However, the Derivatives Segment may specify a higher price scan range than the said 3.5s values for better risk management. The price scan range shall 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 impact cost exceeds 1%, the price scanning range is scaled up by square root of three. The value of s is computed in line with the guidelines specified under J.R. Varma Committee report. The volatility scan range is levied at 10%. The Black-Scholes model is used for valuing options. The computation of risk arrays for Stock option contract is done only at discrete time points each day and the latest available risk arrays is applied to the portfolios on a real time basis. The risk arrays is updated 5 times in a day taking the closing price of the previous day at the start of trading and taking the last available traded prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., and at the end of the trading session taking closing price of the day. b) Short Option Minimum Margin The short option minimum margin equal to 7.5% of the notional value of all short stock options shall be charged if sum of the worst-scenario loss and the calendar spread margin is lower than the short option minimum margin. The notional value of option positions is calculated by applying the last closing price of the underlying stock. The Short Option Minimum Charge for Stock Options Contract, shall be scaled up by square root of three in respect of stocks which have a mean value of impact cost of more than 1%. c) Net Option Value (NOV) The net option value shall be calculated as the current market value of the option times the number of options (positive for long options and negative for short options) in the portfolio. This NOV is added to the liquid networth of the Clearing Member i.e. the value of short options will be deducted from the liquid networth and the value of long options will be added thereto. Thus mark-to-market gains and losses on option positions will be adjusted against the available liquid networth of the Clearing Member. Since the options are premium style, there will be no mark-to-market profit or loss. d) Cash Settlement of Premium The premium is paid in by the buyers in cash and paid out to the sellers in cash on T+1 day. e) Unpaid Premium Until the buyer pays in the premium, the premium due shall be deducted from the available liquid networth on a real-time basis. However, the premium is deducted only for those portfolios where open position is long for a particular series. II) Exposure Limits/Second Line of Defense In case of stock options contracts, the notional value of gross short open positions at any point in time would not exceed 20 times the available liquid networth of a Member, i.e. 5% of the notional value of gross short open position in single stock options or 1.5s of the notional value of gross short open position in single stock options, whichever is higher, will be collected / adjusted from the liquid networth of a Member on a real time basis over and above the margin calculated by SPAN. This is calculated as follows: Long Call / Put Options: No capital adequacy required Short Call / Put Options: Last available closing price of underlying stock* No. of Market lots * x%. Where "x%" is the higher of 5% or 1.5s . For the purpose of computing 1.5s , the s of daily logarithmic returns of prices in the underlying stock in the cash market in the last six months shall be computed. This value shall be applicable for the next month and shall be re-calculated at the end of the month by once again taking the price data on a rolling basis for the past six months. However, BSE may specify higher exposure margin for better risk management.
III) Position Limits
a) Market Level: A market wide limit on the open position (in terms of the number of underlying stock) on stock options and futures contract of a particular underlying stock is :- 20% of the number of shares held by non-promoters i.e. 20% of the free float, in terms of number of shares of a company. The limit would be applicable on all open positions in all futures and option contracts on a particular underlying stock. The Market Wide limit is enforced in the following manner: At the end of the day, BSE tests whether the market wide-open interest for any scrip exceeds 95% of the market wide position limit for that scrip. If so, the Exchange takes note of open position of all client/Trading Members as at the end of that day in that scrip and from next day onwards the Members / client are required to trade only to decrease their positions through offsetting positions. Though the action is taken only at the end of the day, the real time information about the market wide-open interest as a percentage of the market wide position limits is disclosed to the market participants. At the end of each day during which the ban on fresh positions is in force for any scrip, BSE tests whether any Member or client has increased his existing positions, or has created a new position in that scrip. If so, the client shall be subject to a penalty equal to a specified % of the increase in the position. The penalty is recovered along with the Mark-to-Market on the next day. The normal trading in the scrip is resumed after the open outstanding position comes down to 80% or below of the market wide position limit. b) Trading Member Level For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower. For stocks having applicable market wide position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit would be 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crores whichever is lower. Once a Member reaches the position limit in a particular underlying, he is permitted to take only offsetting positions (which results in lowering the open position of the Member) in derivative contracts on that underlying. The position limit at Trading Member level will be computed on a gross basis across all clients of the Trading Member.
c) Client Level The client's gross open position across all derivative contracts on a particular underlying shall not exceed higher of- 1% of the free float market capitalization (in terms of number of shares) or 5% of the open interest in the underlying stock (in terms of number of shares). The position is applicable on the combined positions in all derivatives contracts on an underlying stock. Members are advised to disclose the position of the clients in case the client crosses the aforesaid limits. Members are also advised to inform their clients about the disclosure requirement to BSEon part of the client. d) FII Level For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower. For stocks having applicable market wide position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit would be 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crores whichever is lower e) Sub Account Level Each sub-account of a FII would have the following position limits: The gross open position across all derivative contracts on a particular underlying stock of a sub-account of a FII should not exceed the higher of: 1% of the free float market capitalisation (in terms of number of shares). or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). This position limits would be applicable on the combined position in all derivative contracts on an underlying stock at an exchange. f) NRI Level For stock option and single stock futures contracts, the gross open position across all derivative contracts on a particular underlying stock of a NRI shall not exceed the higher of: 1% of the free float market capitalisation (in terms of number of shares). or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts). This position limits would be applicable on the combined position in all derivative contracts on an underlying stock at an exchange. g) Mutual Fund Level For stocks having applicable market-wide position limit (MWPL) of Rs. 500 crores or more, the combined futures and options position limit shall be 20% of applicable MWPL or Rs. 300 crores, whichever is lower and within which stock futures position cannot exceed 10% of applicable MWPL or Rs. 150 crores, whichever is lower. For stocks having applicable market wide position limit (MWPL) less than Rs. 500 crores, the combined futures and options position limit would be 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crores whichever is lower. h) Limits of each scheme of Mutual Fund For Stock Futures and Option Contracts, the gross open position across all derivative contracts on a particular underlying stock of a scheme of mutual fund shall not exceed the higher of: 1% of the free float market capitalisation (in terms of number of shares) or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts) This position limits is applicable on the combined position in all derivative contracts on an underlying stock. IV) Exercise Limits At present, there is no exercise limit for trading in Stock Option contracts. However, the Derivatives Segment may specify such limit as it may deem fit from time to time. V) Assignment of Options On exercise of an Option by an option holder, it will be assigned to the option writer on random basis at client level. The system will use the same algorithm as in case of assignment of Stock Option Contracts. VI) Settlement of Options On exercise/ assignment of options, the settlement will take place on T+1 basis. The settlement shall take place on the closing price of the underlying in the Cash Segment.
INDEX DERIVATIVES
INDEX FUTURES
A portfolio based margining model is adopted which will take an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on Derivatives Segment. The parameters for such a model are as follows:
I) Initial Margin or Worst Case Scenario Loss The Initial Margin requirement is based on the worst-case loss of portfolio at client level to cover 99% VaR over one day horizon. The initial margin requirement is net at the client level and is on gross basis at the Trading/Clearing Member level. The initial margin requirement for the proprietary position of Trading / Clearing Member is also be on net basis. a) Worst Scenario Loss The worst-case loss of a portfolio is calculated by valuing the portfolio under several scenarios of changes in the respective Index prices. The scenarios to be used for this purpose are:
The price scan range is taken at three standard deviations (100* e(3σ-1)) where s is daily volatility of respective underlying Index or Index Futures whichever is higher. However, the Derivatives Segment may specify a higher price scan range than the said 3s values for better risk management.To cover a 99% VaR over 'T' day’s horizon, the price scan range is based on 3s Ö T where T is number of days. The computation of risk arrays for various Index future contracts is done only at discrete time points each day and the latest available risk arrays is applied to the portfolios on a real time basis. The risk arrays is updated at 5 times in a day taking the closing price of the previous day at the start of trading and taking the last available traded prices at 11.00 am, 12.30 pm, 2.00 pm, and at the end of the trading session taking closing price of the day. b) Minimum Margin The minimum initial margin equal to 5% of the notional value of the contract based on the last available price of the futures contract is applied at all times. To achieve the same, the price scan range is adjusted to ensure that the minimum margin collected doesn’t fall below 5% at any time. In addition the minimum margin shall also be scaled up by the look ahead point. c) Calendar Spread The margin on calendar spread is calculated and benefit is given to the Members for such position. The calendar-spread margin is charged in addition to worst-scenario loss of the portfolio. A calendar spread is treated as a naked position in the far month contract as the near month contract approaches expiry. A calendar spread will be treated as naked positions in the far month contract three trading days before the near month contract expires. The spread charge is specified as 0.5% per month for the difference between the two legs of the spread subject to minimum 1% and maximum 3% as specified in the J. R. Varma Committee report. While calculating the spread charge, the last available closing price of the far month contract is used to determine the spread charge.
II) Exposure Limits/Second Line of Defense: In case of Index futures & Index options contracts, the notional value of gross open positions at any point in time would not exceed 33 1/3 times the available liquid networth of a Member. In case of Index futures contract, 3% of the notional value of gross open position in Index future contract would be collected / adjusted from the liquid networth of a Member on a real time basis.
This is calculated as follows:
Last available closing price of the future series * Quantity * 3% However, BSE may specify higher exposure margin for better risk management. In case of a calendar spread contracts, the calendar spread is regarded as an open position of one third (1/3rd) of the far month contract. As the near month contract approaches expiry, the spread shall be treated as a naked position in the far month contract three days prior to the expiry of the near month contract. III) Mark-to-Market Margin The clients’ positions are marked-to-market on a daily basis at the portfolio level. However, for payment of mark-to-market margin to BSE, the same is netted out at the Member level. a) Collection / Payment : The mark-to-market margin is paid in / out in cash on T+1 day. b) Methodology for calculating Closing Price for mark-to-market: The daily closing price of the Index futures contract for mark-to-market settlement is arrived at using the following algorithm:
The theoretical price is arrived at using following algorithm:
The Bank Rate + 1% would be taken as risk free interest rate percentage and dividend yield is taken as zero for simplicity.
IV) Final Settlement On the expiry of an Index futures contract, the contract is settled in cash at the final settlement price. However, the profit /loss is paid in /paid out in cash on T+1 basis. The final settlement price of the expiring futures contract is taken as the closing price of the underlying Index. The following algorithm is presently being used for calculating closing value of the (individual scrips including the scrips constituting the Index) in the equity segment of BSE:
V) Position Limits a) Trading Member Level: The Trading Member position limits in equity index futures contracts shall be higher of:
or
This limit would be applicable on open positions in all futures contracts on a particular underlying index as prescribed by SEBI. b) Client Level Any person or persons acting in concert who hold 15% or more of the open interest in all derivatives contracts on the Index shall be required to report the fact to BSE and failure to do so shall attract a penalty as laid down by BSE / clearing corporation / SEBI. c) FII position limits in Index Futures Contracts. FII position limits in equity index futures contracts shall be higher of:
or
This limit would be applicable on open positions in all futures contracts on a particular underlying index as prescribed by SEBI. In addition to the above, FIIs can take exposure in equity index derivatives subject to the following limits
d) Sub-account Level Each sub-account of a FII would have the following position limits: A disclosure requirement for any person or persons acting in concert who together own 15% or more of the open interest of all derivative contracts on a particular underlying index. e) NRI Level The position limits for NRIs shall be the same as the client level position limits specified above. Therefore, the NRI position limits shall be – For Index based contracts, a disclosure requirement for any person or persons acting in concert who together own 15% or more of the open interest of all derivative contracts on a particular underlying index. f) Mutual Fund Level Mutual Fund position limits in equity index futures contracts shall be higher of:
or
This limit would be applicable on open positions in all futures contracts on a particular underlying index as prescribed by SEBI. In addition to the above, Mutual Funds can take exposure in equity index derivatives subject to the following limits:
g) Limits of each scheme of Mutual Fund For Index based Contracts, Mutual Funds are required to disclose the total open interest held by its scheme or all schemes put together in a particular underlying index, if such open interest equals to or exceeds 15% of the open interest of all derivative contracts on that underlying index. INDEX OPTIONS
A portfolio based margining model is adopted which will take an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on Derivatives Segment. The parameters for such a model are as follows:
I) Initial Margin or Worst Case Scenario Loss The Initial Margin requirement is based on the worst-case loss of portfolio at client level to cover 99% VaR over one day horizon. The initial margin requirement is net at client level and is on gross basis at the Trading/Clearing Member level. The initial margin requirement for the proprietary position of Trading / Clearing Members are also on net basis. The initial margin (or the worst scenario loss) is adjusted against the available liquid net worth of the Member. Members in turn will collect the initial margin from their clients on an up front basis. a) Worst Scenario Loss The worst-case loss of a portfolio is calculated by valuing the portfolio under several scenarios of changes in the underlying Index value and also the changes in the volatility of the underlying Index. The scenarios to be used for this purpose are:
The price scan range is taken at three standard deviations (100* e(3σ-1)) where s is daily volatility of respective Index. However, the Derivatives Segment may specify a higher price scan range than the said 3s values for better risk management. The value of s is computed in line with the guidelines specified under J.R. Varma Committee report. The volatility scan range is levied at 4%. The Black-Scholes model is used for valuing options.The computation of risk arrays for Index option contract is done only at discrete time points each day and the latest available risk arrays is applied to the portfolios on a real time basis. The risk arrays is updated 5 times in a day taking the closing price of the previous day at the start of trading and taking the last available traded prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., and at the end of the trading session taking closing price of the day. b) Short Option Minimum Margin The short option minimum margin equal to 3% of the notional value of all short Index options shall be charged if sum of the worst-scenario loss and the calendar spread margin is lower than the short option minimum margin. The notional value of option positions is calculated by applying the last closing price of the underlying Index. c) Net Option Value (NOV) The net option value shall be calculated as the current market value of the option times the number of options (positive for long options and negative for short options) in the portfolio. This NOV is added to the liquid networth of the Clearing Member i.e. the value of short options will be deducted from the liquid networth and the value of long options will be added thereto. Thus mark-to-market gains and losses on option positions will be adjusted against the available liquid networth of the Clearing Member. Since the options are premium style, there will be no mark-to-market profit or loss. d) Cash Settlement of Premium The premium is paid in by the buyers in cash and paid out to the sellers in cash on T+1 day. e) Unpaid Premium Until the buyer pays in the premium, the premium due shall be deducted from the available liquid networth on a real-time basis. However, the premium is deducted only for those portfolios where open position is long for a particular series. II) Exposure Limits/Second Line of Defense In case of Index Futures & Index options contracts, the notional value of gross short open positions at any point in time would not exceed 33 1/3 times the available liquid networth of a Member. The 3% of the notional value of gross short open position in Index options, will be collected / adjusted from the liquid networth of a Member on a real time basis over and above the margin calculated by SPAN. This is calculated as follows: Long Call / Put Options: No capital adequacy required Short Call / Put Options: Last available closing price of underlying Index * Quantity * 3%. However, BSE may specify higher exposure margin for better risk management.
III) Position Limits a) Trading Member Level The Trading Member position limits in equity index options contracts shall be higher of:
or
This limit would be applicable on open positions in all Options contracts on a particular underlying index as prescribed by SEBI. b) Client Level Any person or persons acting in concert who hold 15% or more of the open interest in all derivatives contracts on the Index shall be required to report the fact to BSE and failure to do so shall attract a penalty as laid down by BSE / clearing corporation / SEBI. c) FII position limits in Index options Contracts FII position limits in equity index options contracts shall be higher of:
or
This limit would be applicable on open positions in all Options contracts on a particular underlying index as prescribed by SEBI. In addition to the above, FIIs can take exposure in equity index derivatives subject to the following limits
d) Sub-account Level Each sub-account of a FII would have the following position limits: A disclosure requirement for any person or persons acting in concert who together own 15% or more of the open interest of all derivative contracts on a particular underlying index. e) NRI Level The position limits for NRIs shall be the same as the client level position limits specified above. Therefore, the NRI position limits shall be – For Index based contracts, a disclosure requirement for any person or persons acting in concert who together own 15% or more of the open interest of all derivative contracts on a particular underlying index. f) Mutual Fund Level Mutual Fund position limits in equity index options contracts shall be higher of
or
This limit would be applicable on open positions in all options contracts on a particular underlying index as prescribed by SEBI. In addition to the above, Mutual Funds can take exposure in equity index derivatives subject to the following limits
g) Limits of each scheme of Mutual Fund For Index based Contracts, Mutual Funds are required to disclose the total open interest held by its scheme or all schemes put together in a particular underlying index, if such open interest equals to or exceeds 15% of the open interest of all derivative contracts on that underlying index. IV) Exercise Limits At present, there is no exercise limit for trading in Index Option contracts. However, the Derivatives Segment may specify such limit, as it may deem fit from time to time. V) Assignment of Options On exercise of an Option by an option holder, it will be assigned to the option writer on random basis at client level. VI) Settlement of Options On exercise/ assignment of options, the settlement will take place on T+1 basis. The settlement shall take place on the closing price of the underlying in the equity segment. |
