Risk management

Risk management at the exchange level uses SPAN margin (computed every minute), position limits (caps on open interest by client and broker), and circuit filters (price bands beyond which trades pause). At the broker level, margin calls and forced liquidation prevent client losses from cascading. At the trader level, position sizing and stop-losses protect capital.

SEBI sets position limits per client and per broker — for example, a client may not hold more than 5% of total open interest in any contract. Exchange-level circuit filters: NIFTY index has 10%, 15%, 20% daily limit halts; individual stock futures have 20% limits; options can have wider bands due to non-linear payoffs. Broker risk-management departments monitor margins continuously; positions are auto-squared off when MTM hits thresholds. For dealers, the firm-level "fat-finger" controls and pre-trade risk checks are mandatory under SEBI broker norms.

A 2018-19 change: physical settlement of stock derivatives. Long calls/puts that are ITM at expiry must take/deliver actual shares, requiring full settlement margin (often 100% of contract value) in the days leading to expiry. Many retail traders unknowingly held ITM positions to expiry and got margin-called for the physical settlement amount. Distributors and dealers must educate retail on closing positions before expiry to avoid this trap. The exam tests this scenario explicitly.