Margining in Futures market

• Whole system dwells on margins:

• Daily Margins
• Initial Margins
• Special Margins

• Compulsory collection of margins from clients including institutions.
• Collection of margins on the Portfolio basis not allowed by L. C. Gupta committee.

Daily Margins

• Daily margins are collected to cover the losses which have already taken place on open positions.

• Price for daily settlement - Closing price of futures index.
• Price for final settlement - Closing price of cash index.

• For daily margins, two legs of spread positions would be treated independently.
• Daily margins should be received by CC/CH and/or exchange from its members before the market opens for the trading on the very next day.
• Daily margins would be paid only in cash.

Initial Margins

• Margins to cover the potential losses for one day.
• To be collected on the basis of value at risk at 99% of the days.
• Different initial margins on:

• Naked long and short positions.
• Spread positions.

Short positions 100 [exp (3s_t ) - 1]
Long positions 100 [1 - exp (3s_t)]
Where (s_t)² = l(s_t-1)2 + (1-l)(r_t²)

• s_t is today’s volatility estimates.
• s_t-1 is the volatility estimates on the previous trading day.
• l is decay factor which determines how rapidly volatility estimates change and is taken as 0.94 by Prof. J. R. Verma.
• r_t is the return on the trading day [log(I_t/I_t-1)]
• Because volatility estimate s_t changes everyday, Initial margin on open position will change every day.
  (for first 6 months of futures trading, minimum initial margin on naked positions shall be 5%)

Spread positions

• Flat rate of 0.5% per month of spread on the far month contract.
• Min. margin of 1% and maximum margin of 3% on spread positions.
• A calendar spread would be treated as open position in the far month contract as the near month contract approaches maturity.
• Over the last five days of trading of the near month contract, following percentages of the spread shall be treated as naked position in the far month contract:

• 100% on the day of expiry
• 80% one day before the expiry
• 60% two days before the expiry
• 40% three days before the expiry
• 20% four days before the expiry

Margins on the calendar spread is to be reviewed after 6 months of futures trading.

Liquid assets and Broker’s net worth

• Liquid assets

• Cash, fixed deposits, bank guarantee, government securities and other approved securities.
• 50% of Liquid assets must be cash or cash equivalents. Cash equivalents means cash, fixed deposits, bank guarantee and government securities.

• Liquid net-worth = Liquid asset - Initial margin
• Continuous requirement for a clearing member:

• Minimum liquid net-worth of Rs. 50 Lacs.
• The mark to market value of gross open position shall not exceed 33.33 times of member’s liquid net worth.

Basis for calculation of Gross Exposure:

• For the purpose of the exposure limit, a calendar spread shall be regarded as an open position of one third of the mark to market value 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 in the same manner as defined in slide no. 49.

Margining in Futures market

Initial Margin (Value at risk at 99% of the days)
Daily Margin
Special Margins

• Striking an intelligent balance between safety and liquidity while determining margins, is a million dollar point.

    
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