Risk Management

Importance

Any debit is “Risk” Any extra limit is “Risk” Any uncleared cheque is “Risk” 5paisa vs Rs.100

WHY “BECAUSE OUR MONEY IS AT STAKE

& NOT CLIENTS MONEY”

Tasks of the risk department

Limits set up Follow up for block & sell clients Surveillance Stock payout approval Branch support

Client category

Category NBFC – NBFC FundedCategory NFDC – Non Funded Category BTOB – Bill to Bill Client Category NRIC – Non Resident Indian Client

Concepts

Ledger Balance (LB)

Adjusted Ledger Balance (ALB)Ledger balance minus NBFC Debit 1.5 times value of undelivered

stock Billing amount of stock purchased

in ND period MTM Loss on short options

Concepts

Gross Holding Value (GHV)Value of total funded stocks

Adjusted Holding Value (AHV)Value of total funded stocks after haircut

Zero Holding Value (ZHV)Value of Non funded stock

Total Holding Value (THV)Total value of GHV + ZHV

Concepts

SPAN Margin and Exposure MarginAs applicable by Exchange. You can view the approximate margincharged by exchange from the below linkhttp://www.5paisa.com\5pit\spma.asp

NetworthALB + GHV + Span Margin

Concepts

Gross Holding Value Cover % (GHVC)ALB + GHV / GHV * 100

Adjusted Holding Value Cover % (AHVC)ALB + AHV / AHV * 100

Total Holding Value Cover % (THVC)ALB + THV / THV * 100

Lets take an example

ALB = (1,00,000) GHV = 1,60,000 AHV = 1,36,000 ZHV = 2,00,000

Calculate GHVC %

37.50 % AHVC % 26.47 %

THVC % 72.22 %

 

100% and above - Normal trading limits

50% to 100%- Normal trading limits (Remember this is only for 5 trading session from last trade)

<50% Risk Selling to bring in cover of 100%

GHV % Cover =

 

4 Haircuts viz. 15%, 30%, 45% & 100%

 

Category NFDC/BTOB/NRIC clients : (Pure credit)

 

 

 

< 25% - Risk Manager will sell stock to bring client above 40%cover 

 25% and above - Normal trading limitsGHV % Cover =

 4 Haircuts viz. 15%, 30%, 45% & 100%

  Category NBFC clients : (NBFC agreement)

Investor terminal

Margin Deposit for NBFC/ NFDC/NRIC/BTOB Customers = (AHV +ALB)

Exposure Cash: ( Margin Deposit) X 6 times

Exposure F & O: Margin Deposit

TTADV

Margin Deposit for NBFC/ NFDC/BTOB/NRIC Customers = (AHV +ALB)

Exposure Cash:A Cat: Margin Deposit x 6.67 timesB Cat: Margin Deposit x 3.33 timesC Cat: Margin Deposit x 2.25 timesZ Cat: Margin Deposit x 1 time

Exposure F&O: Margin Deposit

Example

ALB (40,000), GHV 1,00,000, AHV 85,000Margin = (-40,000 + 85,000 )= 45,000If client buy or short ‘A’ category stock then client can take the positionup to Rs. 300150If client buy or short ‘B’ category stock then client can take the positionup to Rs. 149850If client buy or short ‘C’ category stock then client can take the positionup to Rs. 101250If client buy or short ‘Z’ category stock then client can take the positionup to Rs. 45,000 only

ORIn F&O client can take position up to 45,000 margin or premium

Problem

A NBFC client has ‘A’ category stocks Rs 10 lakhs, ‘B’ category stocks worth Rs 25 lakhs, ‘C’ category stocks Rs 8 lakhs and ‘Z’ category Rs 45 lakhs. He has ALB of Rs -12 Lakhs. He is using Trader Terminal and he wants to buy a ‘B’ category stock. How much exposure will he get?

Rs.61,27,200

Problem

A NBFC client using investor terminal has ‘B’ category stock of Rs 30 lakhs, ‘C’ category stock Rs 10 lakhs and ‘Z’ category stock Rs 8 lakhs. His ALB is Rs -10 lakhs. He wants to buy a ‘C’ category stock. How much exposure will he get?

Rs.99,00,000

NEAT & BOLT

Do not take any position on the basis of unclear cheques or stock transfer.

Do not take any position in block & sell clients without squaring off old position. After squaring off old position client should be in cover

Take the position as per limits shown in WIRE

Block & Sell

‘NBFC’ Category ( Below 25%GHV) – Sell to bring into 40% GHV ‘NFDC’ Category ( Below 50% GHV) – Sell to bring into 100%

GHV NFDC GHVC 50-100% if not trading for 5 days or more than

Risk will sell BTOB & NRIC Compliance is must & sole responsibility is on

RM / Branch. In the event of client outstanding beyond 5 days, Risk will take discretionary action

RM’S duty for block & sell

Update Remarks for All Risky Clients Daily Before 9:30 whether selected for “Sold by HO or not” is irrelevant Cheque Collected – CMS updated Cheque is on the way – CMS will be updated by 12:30 BTST( Buy Today Sell Tomorrow) Customer Client Changing to NBFC Shares Received as additional margin Cheque Cleared but credit not given

No Remarks – 99% Chances that Stocks will get Sold

Remember it is RISK DEPARTMENT’s discretion to sell or not to sell once client comes in Block and Sell, so ensure your client does not comes under same or remarks are updated sensibly & logically.

To reiterate

Risk Management is rule based – what is written can be read by all Assume funds will not come from a customer who is out of money Stock is not adequate cover Risk Management is Dynamic To be a good Risk Manager, it is not necessary to have market

view Not get influenced by emotional blackmail

Most importantly

Risk Management is not only sticking to set procedures,but to find the solution by application of logic & human touch to the situation at hand.

Thank You