Risk management

Risk management has three layers. Pre-trade margins: VAR (Value at Risk) margin reflects worst-case daily loss; ELM (Extreme Loss Margin) is an additional buffer for tail events. Mark-to-market (MTM): daily P&L flows between accounts. Position limits: caps on open interest by client, broker, and market. Default handling: Settlement Guarantee Fund (SGF) is the last-resort capital pool that the clearing corp uses to honour obligations when a defaulter cannot pay.

VAR margin is computed using historical price simulations — usually 99% confidence over a rolling window. Higher volatility = higher VAR margin. ELM adds 3-5% on top of VAR. For derivatives, SPAN margin replaces VAR (similar concept, scenario-based). Position limits: SEBI sets per-client (e.g., 5% of OI) and per-broker (e.g., 15% of OI) caps for each contract. The SGF is funded by clearing-member contributions and has multi-thousand-crore size — it has been activated rarely (e.g., 2020 during specific broker defaults). Operations teams reconcile margin shortfalls and report to SEBI daily; significant shortages lead to SEBI enforcement.

The Karvy and Anugrah episodes (2019-2020) led to peak-margin reporting and intraday-margin enforcement. Operations roles now monitor margin in near-real-time, with auto-square-offs at threshold breaches. The "true peak margin" concept means brokers must report the highest intraday margin requirement — not just end-of-day. This catches under-margining during volatile sessions. For dealers and operations staff, understanding these dynamics is the core of the SORM exam.