BSE - Derivatives Risk Management
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Risk Management
BSE has a comprehensive risk management system for Futures & Options. The most vital component in risk management is online position monitoring and margining system.

Actual margining and position monitoring is done on-line, on an intra-day basis. BSE uses the SPAN® (Standard Portfolio Analysis of Risk) a registered trademark of the Chicago Mercantile Exchange, used herein under License for the purpose of margining, which is risk-based, portfolio-approach.

Derivative contracts on foreign indices have been structured per the SEBI circular CIR/DNPD/2/2011 dated January 11, 2011. The overall risk management framework is similar to that used for existing listed derivative contracts. However owing to the difference in time zones of the home exchanges of these indices, trading sessions of these indices may not be congruent with the Indian market timings. These issues have been accounted for in the framework created for foreign indices; for further details please refer to the respective contract specifications.

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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:
  • 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:


Risk Scenario Number Price Move in Multiples of Price Range Fraction of Loss to be Considered
1 0 100%
2 0 100%
3 +1/3 100%
4 +1/3 100%
5 -1/3 100%
6 -1/3 100%
7 +2/3 100%
8 +2/3 100%
9 -2/3 100%
10 -2/3 100%
11 +1 100%
12 +1 100%
13 -1 100%
14 -1 100%
15 +2 35%
16 -2 35%


The price scan range is taken at three standard deviations (100*e(3σ-1)) where σ 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 3σ values for better risk management.


To cover a 99% VaR over 'T' day’s horizon, the price scan range is based on 3σ √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 till expiry of near month contract. The calendar-spread margin is charged in addition to worst-scenario loss of the portfolio.

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.

  • 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 net worth of a Member on a real time basis.
This is calculated as follows
 
    Long /Short Index Futures

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.

  • 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:

Weighted average price of all the trades in last half an hour of the continuous trading session.
If there were no trades during the last half an hour, then the theoretical price is taken as the official closing price.


The theoretical price is arrived at using following algorithm:
Theoretical price = Closing value of underlying Index + {closing value of underlying Index * No. of days to expiry * risk free interest rate (at present 7%) / 365}
The Bank Rate + 1% would be taken as risk free interest rate percentage and dividend yield is taken as zero for simplicity.

  • 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:

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

  • Position Limits

    a) Trading Member Level:

The Trading Member position limits in equity index futures contracts shall be higher of:
  • Rs.500 crore
    Or
  • 15% of the total open interest in the market in equity index futures contracts

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:
  • Rs.500 crore
    Or
  • 15% of the total open interest in the market in equity index futures contracts

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.
  • Short positions in Index Derivatives (Short Futures, Short Calls and Long puts) not exceeding (in notional value) the FIIs holding of stocks. The stocks shall be valued at the closing price in the cash market as on the previous trading day.
  • Long positions in Index Derivatives (long futures, long alls and short puts) not exceeding (in notional value) the FIIs holding of cash, government securities, T-Bills and similar instruments. The government securities and T-Bills are to be valued at book value. Money Market Mutual Funds and Gilt Funds shall be valued at Net Asset Value (NAV).
    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

MutuMutual Fund position limits in equity index futures contracts shall be higher of:
  • Rs.500 crore
    Or
  • 15% of the total open interest in the market in equity index futures contracts>


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:


  • Short positions in Index Derivatives (Short Futures, Short Calls and Long puts) not exceeding (in notional value) the Mutual Fund holding of stocks. The stocks shall be valued at the closing price in the cash market as on the previous trading day.

  • Long positions in Index Derivatives (long futures, long alls and short puts) not exceeding (in notional value) the Mutual Fund holding of cash, government securities, T-Bills and similar instruments. The government securities and T-Bills are to be valued at book value. Money Market Mutual Funds and Gilt Funds shall be valued at Net Asset Value (NAV).

    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.