The Hindu Business Line : Tighten up margining to curb volatility, says SEBI

After substantial increase in intra-day and inter-day price volatility in the recent sessions on the bourses, the market regulator has asked the stock exchanges to make the existing margining and monitoring system more stringent, particularly in the cash segment.

The Securities and Exchange Board of India has directed exchanges to increase systemic vigil over the readjustment market of risk assessment by way of minimum five updates of Value at Risk (VaR) during a trading session from once a day now and update the VaR margin rates, accordingly.

Two major exchanges, BSE and NSE, will have to implement the proposals by July 10. For other stock exchanges, the implementation deadline is August 28.

SEBI communication

A SEBI communication to the stock exchange, sent on Friday, said: "With a view to ensuring market safety and protecting the interest of investors and also to further align the risk management framework across the cash and derivative markets, it has been decided that the risk arrays should be updated intra-day in the cash market as has been done in the derivative market. The applicable VaR margin rates shall be updated at least five times in a day, which may be carried out by taking the closing price of the previous day at the start of trading and the prices at 11 a.m., 12:30 p.m., 2 p.m. and at the end of the trading session."

The stock exchanges have further been advised that from the respective implementation dates, "no stock exchange shall permit trading activity unless it is in a position to implement" the latest risk management methodology.

According to market observers, the regulator's move not only brings the cash market on par with the derivatives market in terms of risk assessment, it also brings in standards followed in some other developed markets. According to some market analysts, the move came a little late in the day as it had to give the exchanges time to upgrade their online systems.

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