MARGIN COLLECTION AND REPORTING. FREQUENTLY ASKED QUESTIONS (FAQs)

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Peter Mills
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1 MARGIN COLLECTION AND REPORTING FREQUENTLY ASKED QUESTIONS (FAQs) 1) Whether collection of marg from clients is required the Capital Market Segment? In case of the Capital Market segment members should have a prudent system of risk management to protect themselves from client default. Margs are likely to be an important element of such a system. The risk management system should be well documented and be made accessible to the clients and the Exchange / NSCCL. However, the quantum of margs and the form and mode of collection of margs is left to the discretion of members. 2) Whether collection of marg from clients is required the F&O segment and Currency Derivatives segment? In the F&O segment, it is mandatory for members to collect itial margs from respective clients / constituents on an upfront basis. Similarly the Currency Derivatives segment also, it is mandatory for members to collect itial margs and extreme loss margs from their client / constituents on an upfront basis. 3) When should a member collect margs from clients? Members are required to collect marg from respective constituents on an upfront basis. It is to be ensured that the adequate marg amount from respective constituent (client / tradg member) is available with the member, on the day the relevant trades are done. It is mandatory for all tradg / clearg members to report details of such margs collected on an upfront basis to the Clearg Corporation. 4) In what form should a member collect marg from its constituents? Members may collect margs from its respective client any of the followg forms only, after takg to account their risk management systems and liquidity aspects. Funds Bank guarantee issued by any approved bank Fixed deposit receipts (FDRs) issued by any approved bank Liquid securities dematerialized form, actively traded on the National Exchanges, which are specifically not declared as illiquid securities. (List of illiquid securities are declared on a regular basis by the Exchanges) with appropriate hair cut as the case may be Units of liquid mutual funds dematerialized form, whose NAVs are available and which could be liquidated readily with appropriate hair cut as the case may be. Government securities and Treasury bills electronic form with appropriate hair cut as the case may be. Page 1 of 11

2 Any other such collaterals, as may be specified by NSCCL from time to time 5) Can a member collect additional margs from their constituents (client / tradg member)? Members can collect additional amounts towards margs as per their system of risk management to protect themselves from constituent level default. 6) What methodology should be adopted while reportg marg collection case marg is received the form of funds i. In respect of funds received towards marg Funds the account of respective client can only be considered towards funds which means (+) Credit F&O client ledger ( ) debit client F&O ledger should be first set off (+) Value of marg deposits F&O segment (+) marg amount if debited client ledger (+) All open debit bills representg MTM loss or otherwise which are not due for settlement for which entries are passed client ledger till T Day ( ) All open credit bills representg MTM profit or otherwise which are not due for settlement for which entries are passed client ledger till T Day (+) Funds received from client or settlement payout of Exchange only after ensurg that the same is received from/belongs to respective client (+) cheque received from client only if deposited with bank for clearg/collection and entry is made respective client ledger account till marg date ( ) cheque is returned unpaid (+) Excess /Value of securities CM segment/currency Derivatives segment (other than government securities and any other form which are not acceptable the F&O segment) of the Exchange ( ) debit client ledgers respective segment/marg obligation should be first set off 7) Clarifications regardg open bills and the treatment of the same while reportg margs to the Exchange? Wherever members are followg T day billg viz. debitg / creditg client ledgers with the value of MTM / settlement on the date of transaction and not the settlement day, such a scenario, all the bills pertag to MTM / settlement which are not yet due for settlement till the marg date are termed as open bills and should be reversed for arrivg at the funds ledgers of the client for the purpose of reportg margs to the Exchange In case members are followg settlement day billg system viz. debitg / creditg client ledgers on Page 2 of 11

3 T+1 day the F&O segment and / or T+2 day the CM segment, such a scenario, members need not reverse the effect of any such bills while considerg ledger s for the purpose of reportg of margs. 8) What methodology should be adopted while reportg marg collection case marg is received the form of securities? i. In respect of securities received towards margs 1) actively traded on the National Exchanges, which are specifically not declared as illiquid securities (by the Exchanges), received from respective client should be considered towards marg collection and appropriate haircuts are to be applied on the value of such securities. 2) The applicable haircut to be applied on such securities is the VaR marg rate applicable for the security the Capital Market segment 3) Holdg of received towards margs a) received the constituent beneficiary account of the member and held as on the applicable marg date can be considered towards marg requirement. However computation should be as per the closg rate on T 1 day and not the marg day. b) Value of securities of clients after appropriate hair cut, available with the member, can also be cluded as marg collected from clients. c) the pool account of the tradg member received as early pay towards an obligation to deliver shares the Capital Market Segment should not be considered towards marg requirement other segments. d) Any securities either received directly from respective clients depository account or received from settlement pay out of the Exchange should be considered only after ensurg that the same is received from / belongs to the respective client. 4) Dematerialized units of liquid mutual funds whose NAVs are available and which could be liquidated readily may be considered while reportg margs collected from constituents with applicable haircut on the value of such securities. 5) Clearg Members may accept foreign sovereign securities from FII constituents towards margs the F&O segment of the Exchange as per the applicable guideles force with applicable haircut on the value of such securities. 6) Members may accept Government of India (G Sec) / Treasury bills (T bills) electronic form for the purpose of reportg marg collection to the Exchange with applicable haircut on the value of such securities Page 3 of 11

4 7) The value of liquid securities / liquid mutual funds / Government / Treasury Bills available towards marg should first be set off agast the debit s and any other obligations the respective segments and only the remag value of securities can be considered as marg collected. 9) Can securities other than those the approved list of securities be considered while reportg marg collection to the Exchange? Liquid securities actively traded on the National Exchanges, which are specifically not declared as illiquid securities and are received from the respective client may be considered by the member while reportg margs to the Exchange. The value of such securities would be computed as per the closg rate on T 1 day, reduced by the applicable haircut based on the VaR marg rate applicable for the security the Capital Market segment 10) What methodology should be adopted while reportg marg received the form of liquid mutual funds? Dematerialized units of liquid mutual funds whose NAVs are available and which could be liquidated readily may be considered while reportg margs collected from constituents. Such units should be available with the member or should be lien marked / pledged favour of the member. The value of listed liquid mutual funds should be computed based on the NAV on T 1 day, reduced by a haircut equivalent to the VaR. In case of others (mutual funds not listed) the haircut should be equivalent to 10% of the NAV. 11) What methodology should be adopted while reportg marg received the form of Government securities and Treasury bills? G Sec/T Bills available electronic form or lien marked / pledged favour of the tradg member / clearg member may also be considered while reportg marg collection to the Exchange. The valuation of G Sec/T Bill shall be based on closg price of G Sec/T Bills on NDS on T 1 day reduced by a haircut of 10%. 12) What methodology should be adopted while reportg marg collection case marg is received the form of bank guarantees/fixed deposit receipts? i. In respect of Bank Guarantee s / Fixed Deposit Receipts received towards margs 1) Bank guarantees and Fixed deposits received towards marg, should have been issued by approved banks and discharged favour of the member only. 2) The value of Bank guarantees and Fixed deposits available towards marg should first be set off Page 4 of 11

5 agast the debit s and any other obligations the respective segments and only the remag value can be considered as marg collected. An dicative format for computg the marg collected from clients F&O segment is given as per Annexure 1. Reportg to NSCCL may be done accordance with the same. The given formats can be suitably modified for the purpose of computg the value of Margs collected the Currency Derivatives segment. 13) Which are the components which should not be considered and reported as marg collected from clients? Marg collected any form other than prescribed by the Exchange/Clearg Corporation, should not be considered for marg reportg. The followg is an dicative list of collaterals that shall not be considered towards marg collection: 1) Immovable properties 2) declared as illiquid by the National Exchanges 3) Post dated cheques 4) Cheques not cleared / bounced back / returned unpaid 5) Cheques not banked till the marg date 6) Value of BG created by the member agast funds / FDR s / any other collaterals received from clients / constituents 7) Balances available the commodity exchange. 14) How should the member report marg collected from the constituent? For tradg members, NSCCL downloads MG13 file and for clearg members, NSCCL downloads MG12 file. Value of marg collected from each tradg member/client as the case may be is to be entered the relevant file and the file is to be uploaded to NSCCL with 2 workg days. It is clarified that only margs collected on an upfront basis, as per pot no. 6, 8 and 12 should be reported as collected the marg file uploaded to NSCCL. Each row of the marg file provides the details of margs for a specific tradg member / client, as per the code entered by the members at the time of order entry. The exact amount of marg collected from tradg member as on the date of requirement is to be reported. Any shortfall marg collection is to be reported accordgly. Members who have no marg liability shall not receive any marg file from the exchange. If any tradg member / client does not have any marg liability, such code is not reflected the MG12 / MG13 file downloaded to the member. 15) What does short reportg of marg mean? Page 5 of 11

6 In case a member fails to collect requisite marg from the respective client on an upfront basis and reports to the Exchange that marg collected from client is less than the actual amount of margs required to be collected (as per the MG12 / MG13), it is termed as short reportg of marg collection. Short reportg of Marg = Amount of marg required to be collected Amount of marg actually collected and reported All stances of non reportg of client margs by members shall be treated as short reportg of client margs. 16) Are there any charges levied case of short collection and reportg of marg collection? The followg is the existg structure of charges levied case of short reportg by tradg / clearg member per stance the F&O segment of the Exchange. The amount of penalty shall vary as per the percentage of short reportg done by members as dicated below: % of short reportg ( terms of value) Penalty per stance <1% Nil >1% but less than or equal to 10% Reprimand Letter >10% but less than or equal to 20% Rs.500 or 0.05% of the shortage amount whichever is higher subject to maximum of Rs >20% but less than or equal to 100% Rs.1000 or 0.1% of the shortage amount whichever is higher subject to maximum of Rs All stances of non reportg of client margs by members shall be treated as 100% short reportg of client margs and accordgly penalties shall be imposed. Additionally respect of members who have reported short collection of margs / not reported marg collections, on more than three occasions any calendar month, the penalty computation from the fourth stance onwards shall be escalated by a multiple as mentioned below Category 17) What does wrong reportg of marg mean? Multiple More than 10% to 49.99% % to 79.99% % to 100% 1.3 If member has reported collection of marg to the Exchange without actually collectg such margs from clients it amounts to wrong reportg of marg. Page 6 of 11

7 Computation of wrong reportg of marg is as follows: A = Mimum of amount required as per MG13/MG12 file or amount of marg reported to the NSCCL as collected B = Amount of marg actually available the books of member Wrong reportg of marg = A B Wrong reportg of marg would attract suitable disciplary action. For the purpose of such action a distction is made between factual wrong reportg and marg not properly accounted for the books a) Factual wrong reportg means margs not available the books of accounts / register of securities the approved form or marg computation reported to NSCCL not as per the stipulated method (refer to pot no. 6,8,12) b) Marg not properly accounted means marg though available with member approved forms however not properly recorded and available their books of accounts/registers. 18) What is the penalty applicable for wrong reportg of marg? The Exchange durg spection of members, verifies the correctness of the amounts reported by a member as marg collected from constituents. In case of any wrong reportg observed for the F&O segment of the Exchange, applicable fe / penalty as per the existg fe structure mentioned hereunder as per circular no. NSE/INSP/9971 dated 27 th December 2007 is levied. Wrong Reportg of Margs (F&O segment) (a) % of factual wrong reportg of marg collection from constituents to total marg reported as collected is : Upto 5% Warng > 5% and upto 10% 0.5% of wrongly reported amount > 10% and upto 25% 2% of the wrongly reported amount > 25% and upto 50% 2% of the wrongly reported amount and suspension from tradg for 1 day > 50% 2% of the wrongly reported amount and suspension from tradg for 5 days (b) % of (marg available but not properly accounted for / received from third parties) to total marg reported as collected is : Upto 5% Advice > 5% and upto 10% 0.5% of the wrongly reported amount, s. t. a maximum of Rs 25,000/ > 10% and upto 25% 0.75% of the wrongly reported amount, s. t. a maximum of Rs 50,000 > 25% and upto 50% 1% of the wrongly reported amount, s. t. a maximum of Rs 75,000/ Page 7 of 11

8 > 50% 1.25% of the wrongly reported amount, s. t. a maximum of Rs 1,00,000/ 19) Are members required to report the marg related formation to clients? Every member shall mata proper records of collateral received from clients (Circular no. NSE/INSP/10605 dated 21 st April 2008) cludg details of Receipt of collateral from client and acknowledgement issued to client on receipt of collateral Record of return of collateral to client Credit of corporate action benefits to clients Members should have adequate systems and procedures place to ensure that client collateral is not used for any purposes other than meetg the respective client s marg requirements / pay s. Members should also mata records to ensure proper audit trail of use of client collateral. SEBI has also made it mandatory for members to send marg related formation to their clients on a daily basis, which shall, ter alia, clude - details of collateral deposited - collateral utilized - collateral status (available / due from client) with break up terms of cash, fixed deposit receipts (FDRs), bank guarantee and securities. (Circular no. NSE/INSP/10239 dated 11 th February 2008) Apart from marg formation, every member shall send a complete Statement of Accounts for both funds and securities (cludg those received for marg purpose) respect of each of its clients such periodicity not exceedg three months (calendar quarter) with a month of the expiry of the said period. The statement shall also state that the client shall report errors, if any, the statement with 30 days of receipt thereof. For the clarification of members it is further stated that the quarterly statement of accounts (funds & securities) should show day wise flows and outflows of funds / securities to the clients and not simply, the fal /holdg as at the end of the quarter. 20) What is the mode of sendg client marg formation? Client marg formation can be sent through courier, post or e mail consented by the client. The details can be prted a separate enclosure and provided along with contract note issued to clients. The proof of sendg marg formation to the clients should be mataed by the members. 21) What additional compliance is required respect of collaterals collected from a client? Client collateral should not be used for any purpose other than meetg the respective client s marg requirements / pay s Page 8 of 11

9 Proper records of receipt of collaterals, acknowledgement provided to clients, authorization letter case of deposit of their collateral with Exchange / Clearg Corporation, return of the collateral to the client should be mataed. Periodic reconciliation of collaterals received from constituents is to be done by tallyg the securities available on behalf of a client the demat accounts of the member with the s as per the register of securities. Page 9 of 11

10 Annexure 1 Indicative format In case the Member matas segment wise separate register of securities for securities held towards marg F&O Segment Details CM Segment Details Currency Derivatives Segment Date Client Code client ledger Marg Deposit Ledger Value of with member as per Register of Unencumbered F&O segment client ledger Marg Deposit Ledger Value of with member as per Register of Unencumbered CM segment client ledger Marg Deposit Ledger Value of with member as per Register of Marg Required to be collected as per MG 13 file of Currency Derivatives Unencumbered CDS segment * Any other Unencumbered received from the respective client Total Amount Collected from Client towards F&O Segment margs A B C D= A+B+C E F G H= (E+F+G) I J K L M= (I+J+K L) N O= MAX(D+H+M+N,0) * Excess value of securities available any segment which are not liquid securities cannot be setoff/adjusted agast marg requirements the F&O segment and cannot be considered for reportg as marg collected the F&O segment. Note: 1) Surplus free s/securities or excess collaterals available capital market segment and/or currency derivative segment, if required, can be considered by member provided the same is computed as per the above methodology. Further the same should be uniformly and consistently applicable to all the clients. 2) Surplus free s/securities or excess collaterals capital market segment if adjusted by the member the F&O segment the same cannot be considered aga by the member the currency derivatives segment. In other words surplus free of a one segment if adjusted by the member second segment the same s cannot be adjusted twice by the member the third segment. Page 10 of 11

11 3) Separate columns may be used for considerg the value of Liquid Mutual Funds / Government / Treasury Bills / Bank Guarantees / FDRs the respective segment. Page 11 of 11

1. Whether collection of margins from clients is required in the Capital Market Segment?

MARGIN COLLECTION AND REPORTING FREQUENTLY ASKED QUESTIONS (FAQs) 1. Whether collection of margins from clients is required in the Capital Market Segment? In case of Capital Market segment, Members should