You have this almost 900+ list of instruments against which you provide collateral margin after haircut. I had few questions around this -
How is the haircut decided? What formula do you use to come up with the haircut?
How often is this list updated? Can it change at any point in time?
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?
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.
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?
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.
I have collateral margin plus cash in my account. When i sell a option or take a derivatives position, i see that balance is reduced from both collateral margin and cash as well. Wanted to understand
what is the proportion basis which you deduct balances from cash and margin
When there is enough margin to take a position, why do you take the cash.
Exchange mandates for overnight F&O positions minimum 50% of the margin should come in cash or equivalent and remaining 50% in collateral, so the margin is blocked in this ratio.
Ok, understood. so if i do not have cash and only collateral margin, then you will be charging interest at 18% p.a. for 50% of my positions, required margin. And as long as my fund balance shows some cash, i need not be worried about the interest component. In no case my postions will be squared off if i have available margin (though cash may be negative)
I have bought some stocks in cash market, have pledged them and have taken positions in F&O through the collateral margin. i also have some cash in my account.
Wanted to understand, what will be my net worth if i happen to close all positions (Cash and F&O). Please let me know, if the following calculation would be correct ?
Current value of the stocks in the cash market + unrelaised profit in F&O + 50% of the used margin (as the 50% would have been used from cash) + available cash as shown in the funds section
