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Derivatives & Risk Management

Notes comments along with detailed comparative backtesting results of the proposed methodology
and the current methodology. The proposal shall specify the date from which the new
methodology will become effective and this effective date shall not be less than three months
after the date of filing with SEBI. At any time up to two weeks before the effective date, SEBI may
instruct the derivatives exchange and clearing corporation not to implement the change, or the
derivatives exchange and clearing corporation may on its own decide not to implement the
change.

Initial Margin Fixation Methodology (Clause 3.2)

The group took on record the estimation and backtesting results provided by Prof. Varma from
his ongoing research work on value at risk calculations in Indian financial markets. The group,
being satis fied with these backtesting results, recommends the following margin fixation
methodology as the initial methodology for the purposes of Clause 3.1.1.
The exponential moving average method would be used to obtain the volatility estimate
everyday.

Daily Changes in Margins (Clause 3.3)

The group recommends that the volatility estimated at the end of the day's trading would be
used in calculating margin calls at the end of the same day. This implies that during the course
of trading, market participants would not know the exact margin that would apply to their
position. It was agreed, therefore, that the volatility estimation and margin fixation
methodology would be clearly made known to all market participants so that they can compute
what the margin would be for any given closing level of the index. It was also agreed that the
trading software would itself provide this information on a real time basis on the trading
workstation screen.

2.2.2 Government Securities Act (GSA) 2006

'Government security' means a security created and issued by the Government for the purpose
of raising a public loan or for any other purpose as may be notified by the Government in the
Official Gazette.

A Government security may be issued in the form of a:
1. Government promissory note
2. Bearer bond payable to bearer

3. Stock
4. Bond held in a bond ledger account
A stock means a Government security (i) registered in the books of the RBI for which a stock
certificate is issued; or (ii) held at the credit of the holder in the subsidiary general ledger
account including the constituent's subsidiary general ledger account maintained in the books
of the RBI, and transferable by registration in the books of the RBI.

A transfer of a government security shall be valid only if it purports to convey the full title to the
security. The transfer of the Government securities shall be made in such form and in such
manner as may be prescribed.

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