Verma Panel Moots More Margins For Derivatives

The Securities and Exchange Board of India (Sebi)-appointed J R Verma committee on risk containment for futures and options trading is planning to impose an additional exposure margin for brokers alongside the VAR (value-at-risk) initial margin.

The understanding is that considering India's experience in the cash markets, it would be better to be "adequately conservative" in the derivatives markets when trading commences.

Thus, the Indian markets would have the most stringent margining set-up when index-based futures are introduced. This exposure margin would be over and above the L C Gupta committee pre-conditions set out for financial derivatives. The committee is set to meet shortly to finalise the margining structures.

 

Even while the capital markets await the notification relating to derivatives being defined as a security, the National Stock Exchange (NSE) is readying itself for derivatives trading.

The Securities and Exchange Board of India has now cleared at least 840 members from the National Stock Exchange as member representatives for derivatives trading through its certification programme.

Most of the members now cleared have applied as both clearing and trading members in the exchange.

According to top-level sources, the NSE now operates at a VAR of 99 per cent. This would mean that the initial margin would cover up to 99 per cent of the pay-in cases.

The value-at risk approach is a portfolio approach linked to the margining system for each broker, and is a most comprehensive system used internationally while evaluating the broker's networth. The VAR (which will determine the initial margin for each member) is one of the pre-conditions set out by the Gupta report.

Most of the international derivatives exchanges operate at a VAR of 95 per cent, sources pointed out .

Explaining the rationale behind a more stringent margining system, Ravi Narain, deputy managing director, NSE, said, "While the exposure limit would be inherently VAR-based, it was felt that a stricter system needs to be in place. It would possibly be a good measure for the cash markets, and this concept could creep back there. It would be better that a conservative approach is adopted in the initial stages.''.

The Verma committee would review the margining systems and decide on stringency levels accordingly.

The NSE currently has a 50-member, derivatives-dedicated staff with 20 of them operating in the surveillance, settlement and clearing sectors while another 20 are involved on the systems and telecom side.

The bourse has already met with the other pre-conditions laid out by the Gupta committee relating to derivatives trading.

These include the setting up of an independent clearing corporation, the imposition of a mark-to-market margin, the electronic fund transfer system with the respective banks, a gross exposure margining system, the VAR schedule and the Securities and Exchange Board of India-approved certification programme.