What are the different types of margins levied by the exchanges?
1. Value at Risk (VaR)
- To cover the potential loss (due to uncertain risk conditions) that might occur while dealing with securities at a given timeframe, brokers cover collect VAR.
- 1 day- Liquid securities
- 3 days- Illiquid securities
2. Extreme Loss Margin (ELM)
- It is the margin blocked in addition to the VAR margin for gross open position.
- ELM is blocked for risk situations that are not covered in the VAR estimation.
3. Daily/Initial Margin
- At the end of every trading day, brokers collect margin against open positions on the buy/sell side from their clients (to safeguard against eventualities that might occur between two trading days).
- In the Derivatives segment, both the buyer and seller have to deposit an initial margin before the opening day of the Futures transaction.
- It is usually calculated by taking into consideration changes in the daily price of the underlying (e.g., the index) over a specific timeline.
4. Ad hoc Margins
- They are special margins blocked on specific securities depending on the nature of the security.
- It is SEBI prescribed and imposed on brokers with very large positions overall or in specific low-priced stocks that are illiquid.
5. Mark-to-market Margin
- Mark To Market (MTM) margin is the amount that a buyer/seller pays when the market price falls below/rises above the transaction price.
- It is calculated on the basis of the difference between a particular day’s closing price and the previous day’s closing price.
- Mostly applicable to the F&O segment.
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