A STUDY OF RISKMANAGEMENT AT NSE

1. INTRODUCTION :

A sound risk management system is integral to an efficient clearing and settlement

system. NSE introduced for the first time in India, risk containment measures that were
common internationally but were absent from the Indian securities markets. NSCCL
(National Securities Clearing Corporation Ltd.) has put in place a comprehensive risk
management system, which is constantly upgraded to pre-empt market failures. It ensures
that trading member obligations are commensurate with their networth. Risk containment
measures include capital adequacy requirements of members, monitoring of member
performance and track record, stringent margin requirements, position limits based on
capital, on-line monitoring of member positions and automatic disablement from trading
when limits are breached, etc. Daily margins payable by members consists of (1) Value
at Risk Margin, (2) Extreme Loss Margin, and (3) Mark to Market Margin.

Mark to market loss is calculated by marking each transaction in security to the closing
price of the security at the end of trading. In case the security has not been traded on a
particular day, the latest available closing price at the NSE shall be considered as the
closing price. In case the net outstanding position in any security is nil, the difference
between the buy and sell values shall be considered as notional loss for the purpose of
calculating the mark to market margin payable.

The mark to market margin (MTM) is collected from the member before the start of the
trading of the next day. The MTM margin is collected/adjusted from/against the
cash/cash equivalent component of the liquid net worth deposited with the NSE. The
MTM margin shall be collected on the gross open position of the member. The gross
open position for this purpose would mean the gross of all net positions across all the
clients of a member including its proprietary position. There would be no netting off of
the positions and set off against MTM profits across two rolling settlements 1.e., T day
and T-1 day. However, for computation of MTM profits/losses for the day, setting or
netting or setoff against MTM profits would be permitted. In case of Trade for Trade
Segment (TFT segment) each trade shall be marked to market based on the closing price
of that security. The MTM margin so collected shall be released on completion of pay-in
of the settlement.

2) Importance of the study:

In this world of uncertainty risk management has an immense importance in well

functioning markets. Financial derivatives which are introduced with a prime objective of
hedging risk, when used for speculative purposes resulted with increased risk. Thus, risk
management of financial derivatives is a major area of concern. In case of an exchange,
as exchange plays the role of counterparty for both buyer and seller, it is more exposed to
counterparty risk and all other risk associated with the financial derivatives. This leads to
the essence of risk management of derivatives in exchanges.

The various tools used by the exchanges for risk management includes margins, position
limits, and various rules and regulations laid down by the regulatory authority for
derivative trading. All these process of risk management is done by wholly computerized
process and with specific software.

The inclusion of latest technology has made the risk management process more reliable.
The risk management of derivatives not only secures Stock Exchanges, but also creates
confidence in the minds of the investors. This enhances more investments in the
derivatives market, which leads to business prosperity. Thus the most of the exchanges
have their risk management procedure for risk management of derivatives.
 3) Objectives of the study:

• To study about the Risk containment measures at NSE

• To analyse various types of Margins as a part of risk management

• To study the process and operations of NSE’s risk management

system

4) METHODOLOGY OF THE STUDY :

Data collection method:

The collection of data refers to a planned gathering of information relevant to the subject
matter of the study from the units under investigation. The method of collection of data
depends mainly upon the nature, objectives and scope of the inquiry on one hand and
available of resources and time on the other hand. Data may be classified into primary
and secondary data, depending upon the nature and mode of collection.
Primary data:-
Information will be collected through a series of discussions with the personnel of
ADITYA TRADING SOLUTIONS.
Secondary data:-
Secondary data collected from the published magazines and websites to collect the data.
The secondary data is collected form the following sources.
Business magazines
Journals
Websites
Company brouchers and books
5) LIMITATIONS OF THE STUDY

• The project work is mainly based on the above mentioned sources of

information

• The study was made in purview of the guidelines of SEBI, NATIONAL

STOCKEXCHANGE and ADITYA TRADING SOLUTIONS as applicable
to that period only.

• This study is under taken as a part of M.B.A course curriculum during the
summer vacation. Short span of time is a limitation of the study.

6) BIBLIOGRAPHY:

BOOKS:

NSE, INDIAN SECURITIES MARKET REVIEW,2009

Prasanna Chandra, Investment analysis and portfolio management.

S.P.Gupta ,Statistical methods, Sultan Chand&Sons,2007.

WEBSITES:

www.nseindia.com

www.sebi.gov.in

www.moneycontrol.com