Pursuant to the discussions, the following decisions were taken;

1. Margins based on VAR

1. For the scrips in the compulsory rolling settlement, the 99% VAR based margin system would be introduced with effect from July 02, 2001 in the following manner:

• For the additional 251 scrips which will be included in the compulsory rolling settlement with effect from July 02, 2001 exchanges will calculate scrip wise VAR and index based VAR as indicated below and apply the higher of the two as the margin percentage:
• Scrip wise daily volatility will be calculated using the same exponentially weighted moving average methodology that is used in the index futures market and the scrip wise daily VAR will be calculated as 3.5 times the volatility so calculated.
• The index based VAR will be calculated as the index VAR times a suitable multiplier which is discussed further below.
• The multiplier factor for each of these 251 stocks will be calculated every month by comparing the average volatility of the scrip with the average volatility of the index. This multiplier shall not in any case be less than 1.5.
• For the 163 scrips already in the compulsory rolling settlement the margin will be 1.5 times the daily index VAR.
• The minimum daily index VAR shall be 5% as in the index futures market at present.
• The VAR calculated by an exchange at the end of the day would be used for the purpose of margin calculations for the transactions carried out next day.

2. While the above calculations will address 99% of the cases, it would be necessary to have an additional level of margin to address the 1% of the cases to supplement the VAR based margins. Based on the analysis of historical data of individual stock VARs, it was felt that additional margin of 12% may be necessary.
3. The VAR calculations will be based either on BSE Sensex or S & P CNX Nifty and would be disseminated by the BSE and NSE daily on .their websites by 6:30 pm in a downloadable format.
4. Other stock exchanges could make their own VAR calculations based on BSE Sensex and S&P CNX Nifty or freely adopt the VAR calculations available on the sites of BSE and NSE.
5. In addition to the margin calculated on the VAR basis, exchanges shall continue to collect mark-to-market margin.
6. The exchanges should at their discretion impose additional margin on scrips wherever necessary to contain the risks in the market.

Direct debits of members
SEBI has already advised exchanges that a system of direct debit/credit of the members’ settlement account should be in place for margin payment and the practice of payment of margin by cheque shall be completely done away with.

Market Wide Circuit Breakers
With regard to implementing an index based market wide circuit breaker, it was decided that these will apply at three stages of the index movement either way at 10%, 15% and 20%. These circuit breakers will bring about a coordinated halt trading in all equity and equity derivative markets nationwide.

The market wide circuit breakers would be triggered by movement of either BSE Sensex or the NSE S&P CNX Nifty whichever is breached earlier.

• In case of a 10% movement of either of these indices, there would be a 1 hour market halt if the movement takes place before 1 pm. In case the movement takes place at or after 1 pm but before 2:30 pm there will be a trading halt for ½ hour. In case the movement takes place at or after 2:30 pm there will be no trading halt at the 10% level and the market will continue trading.
• In case of a 15% movement of either index, there will be a 2 hour halt if the movement takes place before 1 pm. If the 15% trigger is reached on or after 1 pm but before 2 pm, there will be a 1 hour halt. If the 15% trigger is reached on or after 2 pm the trading will halt for the remainder of the day.
• In case of a 20% movement of the index, the trading will be halted for the remainder of the day.

These percentages will be translated into absolute points of index variations on a quarterly basis and at the end of each quarter these absolute points of index variations would be revised and be applicable for the next quarter.

An analysis of the index movements of BSE Sensex between January 1984 and May 2001 shows that the Sensex has moved by 10% either way on five occasions.

Scrip wise price bands
In addition to the market wide index based circuit filters, the sub group was of the view that there should be individual scrip wise price bands of 20% either way, for all scrips in the compulsory rolling settlement except for scrips on which derivatives products are available or scrips including in indices on which derivatives products are available. This recommendation would need the approval of the SEBI Board which had earlier decided to remove price bands completely in rolling settlement.

For scrips that are not in compulsory rolling settlement, the existing price bands would continue.

Gross margins in the cash market.
Presently margins are calculated on a gross basis across clients in the ALBM/MCFS/BLESS. This will be extended to the entire market. As this step would involve certain modifications in the system software of the exchanges, the gross margining for the entire market would come into effect from September 03, 2001.

Liquidation of deferral positions
The exchanges would monitor closely the outstanding deferral positions on their exchanges and would ensure that time schedule for liquidation are followed and that all deferral positions are liquidated by September 03, 2001. The liquidation of outstanding positions as on July 02, 2001 shall be allowed only with the approved deferral products in the rolling settlement.

Responsibility of the Stock Exchanges
The introduction of the rolling settlement across a large number of scrips which would cover majority of the trading volume, is an important structural change for the market and would require the exchanges to remain vigilant and strengthen their surveillance and monitoring mechanisms.