Collateral Margin Nitty-Gritty

#1

Hi,

You have this almost 900+ list of instruments against which you provide collateral margin after haircut. I had few questions around this -

  1. How is the haircut decided? What formula do you use to come up with the haircut?
  2. How often is this list updated? Can it change at any point in time?
  3. I understand MTM changes to collateral margin with daily price move. But do changes to haircut affect collateral margin even after a particular stock is pledged at a different haircut? In short, if I have pledged a stock at 12.5% haircut, and later for some volatility reason, the stock is updated in your list with haircut of 25%, will my collateral margin decrease to 75% due to this change in haircut?

Thanks in advance :slight_smile:

#2

The haircuts are decided by the Exchanges, they assess risk to each stock and come up with VaR. As a broker, we’re free to charge anything over and above that the Exchanges are charging.

It’s updated once a month, the Exchanges also release the list of Approved securities once a month. We follow a similar timeline.

Yes, this can happen.

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#3

Got it. Thanks for the quick reply.

Just to make sure that I understand it correctly, when you said -

You mean - you like to be more conservative and have a higher haircut over and above exchange VaR or lenient providing more collateral margin to the client. Again, if this discretion provided to broker is backed by a specific formula or basis?

#4

I meant to say that we are allowed to be conservative and charge higher margins than what is being levied by the Exchange. Lenient, we aren’t allowed to be, that’s because margins get reported to the Exchange and when there’s an inspection/audit, the Exchange will calculate the availability of margins as per the rates prescribed by them, so we wouldn’t be able to charge lower haircuts and report higher margins.

We have an internal risk assessment team that assesses and decides if any additional haircut is to be applied or higher margins to be charged. The basis of this is proprietary and I don’t think is share-able. To cite an example, you may have seen on days like election results when the volatility is expected to be higher, lower leverage is provided.

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