Risk Management for Investor at a Brokerage House

Risk Management Policy at Brokerage houses

Brokers are open to risk all the time, let’s say for an example you buy 100 shares of reliance at the rate of Rs 1000 and Delivery Brokerage is .3% which is Rs 3 per share. So the risk is Rs 997 with a broker.

Imagine if you went bankrupt or you don’t fulfill your obligation to the broker, broker is left with 2 options either to call you for your margin deposit or square off your stocks in real time market with current market price. All these process is run by risk management software which continuously monitors the risk in real time environment and at few brokers place this same risk formulas are used to release payment to the client

Normally there are 12 to 13 parameters for overall consideration of risk in Stock Broking

·         Financial balances (Clear / Unclear Balance)

·         Power of Attorney Stock (also referred to as Statement of Holding Stocks) for liquid scrips

·         Power of Attorney Stock (also referred to as Statement of Holding Stocks) for illiquid scrips

·         Beneficiary Stocks (Stocks Withhold by broker in case of debits) for liquid scrips

·         Beneficiary Stocks (Stocks Withhold by broker in case of debits) for illiquid scrips

·         Collateral Stock (Stocks Deposited by you for FO Trading) for liquid scrips

·         Collateral Stock (Stocks Deposited by you for FO Trading) for illiquid scrips

·         Mutual Fund units available in Demat form

·         Span Margin

·         Exposure Margin

·         VAR Margin (Hair cut for Cash Market)

·         Exercised/ Assigned Value

·         Option intrinsic value

·         Futures & Options open positions Market to Market Value

Overall risk at a brokers place revolve around above parameters

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On basis of risk management your next day trading limits are configured

Financial Balances

T+2 Day Balances: Rs 300000 Cr

Assuming T Day as 11/01/2016 , Payin & Payout of funds takes place on T+2 i.e 13/01/2016

If you would have sold some shares on T Day and those shares are lying with broker in POA or Beneficiary or Collateral then you would get entire credit for the shares sold because it would be the broker who would be doing Payin on behalf of you and broker would provide you credit for sale

In Stock Market Credit for sale is referred to the above scenario

Unclear Cheque:-

You gave a cheque to the broker and it is not yet reflected in the bank books of broker , So broker may not give you the credit for the funds in Transit . For our example let’s take Rs 50000 as Fund in transit

Final Balance: Rs 300000 – Rs 50000 = Rs 250000

 Power of Attorney Stocks

Scrip Name	Quantity	Closing Price	Var Margin	After Hair Cut Value on Var	Broker Hair Cut	After Hair Cut Value Broker Haircut	Liquid Scrip	Liquid Value
Asian Paints	10	873.85	12.50	7,646.18	20.00	6,990.8	Y	7,646.18
Hotel Rugby Limited	100000	4.05	51.51	196,384.5	100.00	0.00	N	0.00
Total Value				204,030.68		6990.80		7646.18

We have 3 totals which are

a-> After Hair Cut Value on VAR : 204030.68

b->After hair Cut value as per brokers haircut :- 6990.80

c-> Liquid Value : 7646.18

(Remember Liquid value for Daily Margin Statement and MG13 Reporting is calculated on basis of VAR and Margin Statement value is your next day limit value)

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Beneficiary Stocks

Scrip Name	Quantity	Closing Price	Var Margin	After Hair Cut Value on Var	Broker Hair Cut	After Hair Cut Value Broker Haircut	Liquid Scrip	Liquid Value
Asian Paints	10	873.85	12.50	7,646.18	20.00	6,990.8	Y	7,646.18
Hotel Rugby Limited	100000	4.05	51.51	196,384.5	100.00	0.00	N	0.00
Total Value				204,030.68		6990.80		7646.18

We have 3 totals which are

a-> After Hair Cut Value on VAR : 204030.68

b->After hair Cut value as per brokers haircut :- 6990.80

c-> Liquid Value : 7646.18

(Remember Liquid value for Daily Margin Statement and MG13 Reporting is calculated on basis of VAR and Margin Statement value is your next day limit value)

  

Collateral Stocks

Scrip Name	Quantity	Closing Price	Var Margin	After Hair Cut Value on Var	Broker Hair Cut	After Hair Cut Value Broker Haircut	Liquid Scrip	Liquid Value
Asian Paints	10	873.85	12.50	7,646.18	20.00	6,990.8	Y	7,646.18
Hotel Rugby Limited	100000	4.05	51.51	196,384.5	100.00	0.00	N	0.00
Total Value				204,030.68		6990.80		7646.18

We have 3 totals which are

a-> After Hair Cut Value on VAR : 204030.68

b->After hair Cut value as per brokers haircut :- 6990.80

c-> Liquid Value : 7646.18

(Remember Liquid value for Daily Margin Statement and MG13 Reporting is calculated on basis of VAR and Margin Statement value is your next day limit value)

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Underlying Name	Open Position	Futures MTM	Initial Margin	Exposure Margin	Total Margin
NIFTY 28JAN FUT	75	3500	28446	16904	45350
NIFTY 7500 CE	-75	(Premium Recd)      -6000	29145	16874	46019
Total		-2,500	57,591	33,778	91,369

Total Value for Futures position Rs 91369- Rs 2500 = Rs 88,869/-

Final Calculation for Next Day Trading Limits

Finance (Clear Balance)	-250000	Finance (As Is)	-300000
POA Stock After Hair Cut Value	6990.80	POA Stock on Liquid Value	7646.18
BEN Stock After Hair Cut Value	6990.80	BEN Stock on Liquid Value	7646.18
Collateral Stock After Hair Cut Value	6990.80	Collateral Stock on Liquid Value	7646.18
Span Margin	57,591	Span Margin	57,591
Exposure Margin	33,778	Exposure Margin	33,778
Futures MTM	-2500	Futures MTM	-2500
Next Day Trading as per Clear balance & Brokers Hair Cut method	182,103.4	Next Day Trading limit as per Finance & Liquid Value method	234,069.54

Risk management policy is internal to a brokerage house and up to the discretion of the broker

In case if you want more clarifications on RMS then please post your comment below, I would be happy to assist you 
If you like the post then please tweet or facebook it , Many Thanks 

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In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me  @vipuls1979

Disclaimer  :- 

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Understand Brokers Daily Margin Statement

Understand Your Daily Margin Statement:-

If you are trading through a stock broker in India in any of the segment i.e Equities, Derivatives Currencies then stock broker have to send you Daily Margin Statement as per Annexure B of Exchange Circular Number NSE/INSP/19583 dated December

Daily Margin Statement

Understand the Logic of Daily Margin Statement as follow:-

Segment: - It could be the segment in which your trading is taking place, Assume you are trading with a broker in NSE Equity, NSE Equity Derivatives & NSE Currencies then the report should display all the details pertaining to each segment

Trade Day: - As per brokers terminology it is referred to as T Day, Assume you traded on 23/11/2015 then T Day or Trade Day would be 23/11/2015 and all your data pertaining to the report would be calculated as on T Day

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Funds (A):- Funds is nothing but your ledger balance whether debit or credit. In case if you deposited a cheque in brokers bank account or gave a cheque to broker on T day then it could be taken in to consideration for calculation but again it is at a broker’s discretion because brokers want to play safe. Broker would only consider the cheque once it is cleared and funds are actually transferred in broker’s bank account.

Value of Securities after Haircut : - Value of securities are calculated on daily basis after levying haircut. Remember these securities are the ones in which you had a debit and stock is being withhold by the broker. As per NSE Calculation has to take place the member shall compute the value of such securities as per the closing rate on T-1 day as reduced by the appropriate haircut at a rate not less than the VAR margin rate of the security on that day i.e. T-1

day.

Please find the calculations below

Scrip Name	Holding Quantity	Illiquid	VaR Margin or Haircut by Exchange on T-1 Day i.e 20/11/2015	VaR Margin or Haircut by Broker  on T-1 Day i.e 20/11/2015	Market Rate (T-1) i.e 20/11/2015	Market Value before Haircut	Market Value After Haircut
Reliance Industries	100	No	12.50	12.50	946.85	94685.00	82,849.37
Golden Tobacco Limited	100	Yes	47.48	47.48	48.60	4860.00	4860.00
Total Value of Securities after Hairuct                                                                                                       87,709.30

Above Calculation are derived as per the appropriate haircut at a rate not less than the VAR margin rate of the security on that day i.e. T-1 there are chances that a broker can increase the VaR Margin rate or Haircut as per their own discretion

Please find the calculation below if the VaR Rate or Hair Cut is as per broker’s discretion

Scrip Name	Holding Quantity	Illiquid	VaR Margin or Haircut by Exchange on T-1 Day i.e 20/11/2015	VaR Margin or Haircut by Broker  on T-1 Day i.e 20/11/2015	Market Rate (T-1) i.e 20/11/2015	Market Value before Haircut	Market Value After Haircut
Reliance Industries	100	No	12.50	20.00	946.85	94685.00	75748.00
Golden Tobacco Limited	100	Yes	47.48	100	48.60	4860.00	0.00
Total Value of Securities after HairCut                                                                                                       75748.00

As you can see in the above table Broker has increased their own hair cut which is more than exchange specified haircut which also reduced your holding value. All these is a part of Risk management policy of a stock broker.

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Bank Guarantees / FDR: - Bank Guarantees / Fixed Deposit provided to the broker as Initial Margin for FO , This should be represented against Equity Derivatives and Equity Currency Segment in Daily Margin Statement

Any other approved form of Margins: Approved form of margins is used for Equity Derivatives & Currencies. As Initial Margin is compulsory to be deposited with a broker for trading FO & Currency, approved scrips i.e liquid scrips valuation would be considered in the column.

Logic of the same remains as shown in above table

Total Margins Available: - Funds +/- (Value of Securities + Bank Guarantees + Collateral (Shares) ). Remember the data shown is for a Particular Exchange & Segment for

Example:-

Exchange/ Segment	Funds (A)	Value of Securities (After Haircut) (B)	Bank Guarantees / Fixed Deposit (C )	Any Other Approved form of Margins (D)	Total Margin Available E=(A+B+C+D)
NSE CASH	1,000 Dr	5000 Cr			4,000 Cr
NSE	15,000 Cr		10,000 Cr	7,500 Cr	32,500 Cr
Total	14000 Cr	5000 Cr	10,000 Cr	7,500 Cr	36,500 Cr

Total Summation of the above becomes your Margins Available to T Day i.e Your Trading Day for particular segment

Margin required by Exchange end of T Day

Initial Margin:- Initial Margin is a Span margin levied by exchange to broker and in turn to you.

Futures options, as well as futures margins, are governed by the exchange through a calculation algorithm known as SPAN margining

The Standard Portfolio Analysis (SPAN) of Risk system is a highly sophisticated methodology that calculates performance bond requirements by analyzing the “what-ifs” of virtually any market scenario

The Standard Portfolio Analysis (SPAN) evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the portfolio would incur under different market conditions.  At the core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration.

Assume you wanted to buy 1 Lot of NIFTY NOV 26/11/2015 FUTURES which would have a Span Margin of around Rs 30000/- & 10 Lot of USDINR 26/11/2015 would have a span margin of 15162

(Above calculation are based on last span file of 24/11/2015)

There are certain brokers who levy additional margin over and above span margin levied by exchange. Such details should be maintained in brokers RISK Management Policy and additional span margin charged should be displayed in column J of Daily Margin Statement i.e Additional Margin required by member as per RMS

Exposure Margin: Exposure Margin is an additional margin levied by exchange over and above initial margin to broker and in turn to you.  Exposure margin is the term used for Equity Derivatives & Extreme Loss Margin as the term used for Equity Currencies

As per exchange compliance, Exchange would charge exposure margin to broker and it is up to the broker’s discretion to charge the same to their client again this part is mentioned in brokers RMS policy.

Exposure Margin for Currency segment is not compulsory but still brokers charge the same

Total Margin :-  Sum of Span Margin (Initial Margin + Exposure Margin)

Excess / Shortfall w.r.t. Requirement by Exchange / NSCCL: - Total Available Margins (Shown Above) – Total Margin (Initial +Exposure )

Additional Margin required by member as per RMS: - There are certain brokers who levy additional margin over and above span margin levied by exchange. Such details should be maintained in brokers RISK Management Policy and additional span margin charged should be displayed in column J of Daily Margin Statement i.e Additional Margin required by member as per RMS

Margin Status (Balance with Member / Due from client):- The final figure pertaining to exchange is the amount you require to pay to the broker or broker has to pay to you and this is the amount in which you beginning of day or next day trading limit is available