Tuesday, 12 January 2016

Risk Management for Investor at a Brokerage House

Risk Management Policy at Brokerage houses

Brokers are open to risk all the time, let’s say for an example you buy 100 shares of reliance at the rate of Rs 1000 and Delivery Brokerage is .3% which is Rs 3 per share. So the risk is Rs 997 with a broker.
Imagine if you went bankrupt or you don’t fulfill your obligation to the broker, broker is left with 2 options either to call you for your margin deposit or square off your stocks in real time market with current market price. All these process is run by risk management software which continuously monitors the risk in real time environment and at few brokers place this same risk formulas are used to release payment to the client

Normally there are 12 to 13 parameters for overall consideration of risk in Stock Broking
·         Financial balances (Clear / Unclear Balance)
·         Power of Attorney Stock (also referred to as Statement of Holding Stocks) for liquid scrips
·         Power of Attorney Stock (also referred to as Statement of Holding Stocks) for illiquid scrips
·         Beneficiary Stocks (Stocks Withhold by broker in case of debits) for liquid scrips
·         Beneficiary Stocks (Stocks Withhold by broker in case of debits) for illiquid scrips
·         Collateral Stock (Stocks Deposited by you for FO Trading) for liquid scrips
·         Collateral Stock (Stocks Deposited by you for FO Trading) for illiquid scrips
·         Mutual Fund units available in Demat form
·         Span Margin
·         Exposure Margin
·         VAR Margin (Hair cut for Cash Market)
·         Exercised/ Assigned Value
·         Option intrinsic value
·         Futures & Options open positions Market to Market Value

Overall risk at a brokers place revolve around above parameters
On basis of risk management your next day trading limits are configured

Financial Balances
T+2 Day Balances: Rs 300000 Cr
Assuming T Day as 11/01/2016 , Payin & Payout of funds takes place on T+2 i.e 13/01/2016
If you would have sold some shares on T Day and those shares are lying with broker in POA or Beneficiary or Collateral then you would get entire credit for the shares sold because it would be the broker who would be doing Payin on behalf of you and broker would provide you credit for sale
In Stock Market Credit for sale is referred to the above scenario

Unclear Cheque:-
You gave a cheque to the broker and it is not yet reflected in the bank books of broker , So broker may not give you the credit for the funds in Transit . For our example let’s take Rs 50000 as Fund in transit

Final Balance: Rs 300000 – Rs 50000 = Rs 250000


 Power of Attorney Stocks

Scrip Name
Quantity
Closing Price
Var
Margin
After Hair Cut Value on Var
Broker Hair Cut
After Hair Cut Value Broker Haircut
Liquid
Scrip
Liquid Value
Asian Paints
10
873.85
12.50
7,646.18
20.00
6,990.8
Y
7,646.18
Hotel Rugby Limited
100000
4.05
51.51
196,384.5
100.00
0.00
N
0.00
Total Value



204,030.68

6990.80

7646.18

We have 3 totals which are
a-> After Hair Cut Value on VAR : 204030.68
b->After hair Cut value as per brokers haircut :- 6990.80
c-> Liquid Value : 7646.18
(Remember Liquid value for Daily Margin Statement and MG13 Reporting is calculated on basis of VAR and Margin Statement value is your next day limit value)

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Beneficiary Stocks

Scrip Name
Quantity
Closing Price
Var
Margin
After Hair Cut Value on Var
Broker Hair Cut
After Hair Cut Value Broker Haircut
Liquid
Scrip
Liquid Value
Asian Paints
10
873.85
12.50
7,646.18
20.00
6,990.8
Y
7,646.18
Hotel Rugby Limited
100000
4.05
51.51
196,384.5
100.00
0.00
N
0.00
Total Value



204,030.68

6990.80

7646.18


We have 3 totals which are
a-> After Hair Cut Value on VAR : 204030.68
b->After hair Cut value as per brokers haircut :- 6990.80
c-> Liquid Value : 7646.18
(Remember Liquid value for Daily Margin Statement and MG13 Reporting is calculated on basis of VAR and Margin Statement value is your next day limit value)

  
Collateral Stocks

Scrip Name
Quantity
Closing Price
Var
Margin
After Hair Cut Value on Var
Broker Hair Cut
After Hair Cut Value Broker Haircut
Liquid
Scrip
Liquid Value
Asian Paints
10
873.85
12.50
7,646.18
20.00
6,990.8
Y
7,646.18
Hotel Rugby Limited
100000
4.05
51.51
196,384.5
100.00
0.00
N
0.00
Total Value



204,030.68

6990.80

7646.18

We have 3 totals which are
a-> After Hair Cut Value on VAR : 204030.68
b->After hair Cut value as per brokers haircut :- 6990.80
c-> Liquid Value : 7646.18
(Remember Liquid value for Daily Margin Statement and MG13 Reporting is calculated on basis of VAR and Margin Statement value is your next day limit value)

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Underlying Name
Open Position
Futures MTM
Initial Margin
Exposure Margin
Total Margin
NIFTY 28JAN FUT
75
3500
28446
16904
45350
NIFTY 7500 CE
-75
(Premium
Recd)      -6000
29145
16874
46019
Total

-2,500
57,591
33,778
91,369

Total Value for Futures position Rs 91369- Rs 2500 = Rs 88,869/-

Final Calculation for Next Day Trading Limits
Finance (Clear Balance)
-250000
Finance (As Is)
-300000
POA Stock After Hair Cut Value
6990.80
POA Stock on Liquid Value
7646.18
BEN Stock After Hair Cut Value
6990.80
BEN Stock on Liquid Value
7646.18
Collateral Stock After Hair Cut Value
6990.80
Collateral Stock on Liquid Value
7646.18
Span Margin
57,591
Span Margin
57,591
Exposure Margin
33,778
Exposure Margin
33,778
Futures MTM
-2500
Futures MTM
-2500
Next Day Trading as per Clear balance & Brokers Hair Cut method
182,103.4
Next Day Trading limit as per Finance & Liquid Value method
234,069.54
Risk management policy is internal to a brokerage house and up to the discretion of the broker

In case if you want more clarifications on RMS then please post your comment below, I would be happy to assist you 
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Complete Guide on Monthly Income Plans
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Futures & Options related article :

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In case of any further explanation you can reach me on vipuls1979@gmail.com or tweet me  @vipuls1979

Disclaimer  :- 

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