Value at Risk Margin: VaR is a single number, which encapsulates whole information about the risk in a portfolio. It measures potential loss from an unlikely adverse event in a normal market environment.
Computation of VaR Margin: VaR Margin is a margin intended to cover the largest loss that can be encountered on 99% of the days (99% Value at Risk). For liquid securities, the margin covers one-day losses while for illiquid securities; it covers three-day losses so as to allow the clearing corporation to liquidate the position over three days.
Some Definitions: Computation of the VaR margin requires the following definitions:
(a) Security sigma: It means the volatility of the security computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.
(b) Security VaR: It means the highest of 7.5% or 3.5 security Sigmas.
(c) Index sigma: It means the daily volatility of the market index (CNX Nifty or BSE Sensex) computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.
(d) Index VaR: It means the higher of 5% or 3 index Sigmas. The higher of the Sensex VaR or Nifty VaR would be used for this purpose.
The VaR margin rate computed, as mentioned above, will be charged on the net outstanding position (buy value-sell) of the respective clients on the respective securities across all open settlements. There would be no netting off of positions across different settlements.
Collection of VaR Margin: The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade. The VaR margin is collected on the gross open position of the member.
