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July 02, 1998


The Executive Directors/ Managing Directors
of all the Stock Exchanges


Additional volatility margin

At the meeting of the Inter-exchange Co-ordination Group and Inter-Exchange Surveillance Group of the Stock Exchange which was held on June 25, 1998 to review the prevailing market situation it was agreed that the restrictions on short sales which was limited to a day should be removed with effect from July 6, 1998 and an additional margin system be put in place simultaneously. A small group under the IECG consisting of the representatives of the exchanges of Mumbai, Delhi, Calcutta, Ludhiana, Bangalore, National Stock Exchange and SEBI was set up to work out the details of the additional volatility margin. The details of such margin has been worked out in consultation with the group.

Need for Volatility Margins

It was noted that while the present margin system which included marked to market margin, daily carry forward margin, concentration margin, incremental carry forward margin, and also the exposure limits and intra-day and weekly price bands addressed market risks, there was a need to further strengthen the margin system to curb excessive volatility. It was also felt that weekly price bands coupled with different trading cycles across the exchanges and differential prices created situations in which if a scrip reached the boundaries of a price band during a trading period, the investors did not have any exit route in that scrip for the remaining days of the trading period. Taking these factors into account, the consensus among the stock exchanges was that the system of price bands calls for a review. It was felt that while daily scrip specific price band was necessary, the weekly price bands could be replaced by a graded margin system linked to price movements. Such a graded margin system would on the one hand contain volatility in securities while on the other keep open an exit route for investors. It was felt that this graded margin system should be in addition to the existing margin system. This would provide additional market safety and also act as a deterrent to building up of excessive outstanding positions in the market.

New Additional Volatility Margin System

The following is the system of the additional volatility margins which would be applicable to trading in all stock exchange with effect from July 6, 1998.

Price Bands

The daily price band would be reduced from the current level of 10% to 8%.

The existing weekly price band of 25% is being removed and a graded margin system as given below is put in place for volatile securities.

Definition of Volatility

A security would be considered as volatile if the price of the security varies by plus minus 16% or more in a single trading cycle. For the purpose of computing this price variation, the closing price at the end of each day of the security will be compared with the closing price at the end of the previous settlement. In other words, if Pn(T+1)is a price of a security on the nth day of trading period T+1 and Pl (T) is the price of the security on the last day of trading period ‘T’ then the security will be volatile if Pn(T+1)-Pl (T) ³ 16%.

Provided, however, price variations on account of calls, bonuses, rights, mergers, amalgamations, and scheme of arrangements would be excluded for determining volatile securities and adjustments in prices when securities traded ex benefits will have to be made for the purpose of computation of volatility.Margin Rates

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