Margins go dynamic in NSE bid to curb swings

MUMBAI: Margin traders, who account for 40-50 per cent of the stock market, and who take position in a share by providing only part-payment, will soon be curbed. Moving to curtail extreme volatilities in the stock market, the National Stock Exchange (NSE) said on Saturday that value-at-risk (VaR) margins will be made very dynamic from June 19, calculated almost on an hourly basis, instead of end-of-day as is the case now.

Margin is a certain percentage of the stock price that a client pays his broker (and the broker, in turn, pays the exchange), when he buys a share. The exchange collects this amount from its brokers to cover the risk of falling share prices.

From June 19, intra-day VaR will be generated based on share prices at 11 am, 12.30 pm, 2 pm, and 3.30 pm everyday. A VaR file would also be provided to brokers at the end and the beginning of each trading day.

VaR gives the probability of losses based on the statistical analysis of historical price and volatility of a share and is used in calculating margin requirements.

VaR is applicable practically across the market now. It was earlier levied only on the Bombay Stock Exchange 'A' group and the 50 shares in the NSE Nifty.

"This is a move to bring down speculative trading and wide swings or volatility in share prices," said an analyst with a foreign brokerage.

The move will make the market more secure by cutting down the risk involved in payment processes. It also limits the impact of margin calls to that particular trading day.