Comment on the following: NSCCL has developed a comprehensive risk containment mechanism for the F&O segment.

National Securities Clearing Corporation Limited (NSCCL) has developed a comprehensive risk containment mechanism for the F&O segment with the following salient features: The soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent. NSCCL charges an upfront initial margin for all the open positions of a Clearing Members (CM). It specifies the initial margin requirements for each futures/options contract on a daily basis. It also follows VAR-based margining computed through SPAN. The CM in turn collects the initial margin from the TMs and their respective clients. The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T+1 basis. NSCCL's on-line position monitoring system monitors a CM's open position on a real-time basis. Limits are set for each CM based on his base capital. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for Mark to Market value violation, while TMs are monitored for contract wise position limits violation. CMs are provided a trading terminal for the purpose of monitoring the open positions of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to reduce the intra-day-exposure limits set up by a CM and whenever a TM exceeds the limits, it stops that particular TM from further trading. A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. Position violations result in disablement of trading facility for all TMs of a CM in case of a violation by the CM. A separate Settlement Guarantee Fund for this segment has been created out of the base capital of members. The most critical component of risk containment mechanism for F&O segment is the margining system and online position monitoring. The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM) using SPAN (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI.