Structure of various margins applicable and use of different tools to minimize risk shall be carried on for risk management process. Process of risk management at Exchange level to ensure that party of trade shall not be defaulter and no trade related obligation shall occur to Exchange. In this regards exchange has managed following procedure to manage risk to ensure parties shall not be default to fulfill their commitment on trading.

Margin:

Margins are used to gear up trade but simultaneously it has another aspect that leveraged portion of amount may turn in profit or loss too. In that case looser should be able to fulfill the commitment to gainer. Margin is used as commitment bond of parties involved in trading to ensure that they will comply with commitment. Margins are used in various forms as follows:

Initial Margin:

Initial margin is called as IM in short and this is basically known as commitment bond to initiate or execute position as per trader’s wish to buy or sell. Exchange may differentiate IM for Clearing level and customer level. In this case also upper par of IM shall be disclosed by exchange for customer awareness. Any time when a customer wants to enter in buy or sell any given contracts in market IM is minimum requirement that enables trade. Insufficient IM doesn’t enable trade, so that is preliminary requirement to be maintained by Customer with its broker.

MTM Margin:

Exchange trading enables daily settlement of all open positions and these shall be marked with closing price established by exchange. Once all open positions marked with closing price the difference of amount which is affected the initial or maintenance margin shall be accounted as risk factor and margin call shall be issued to broker and broker shall issue margin call to its customer. This process where all positions are marked with daily closing price of the exchange on each contract and debit/credit on account of trading account occurs and based on that margin notice issued is process of MTM margin. In general there shall be stipulated time frame to fill this margin call or else clearing entity may cut the position till that level which makes it risk free on particular time.

Daily Price Limit

Daily price limit is the maximum and minimum level that a price of any contract can reach for that particular day. It is the maximum amount of gain or loss that can occur on a particular contract/s. If a price of the contracts reaches the daily price limit, trading on that contract shall be suspended for certain time period or may be for the remainder of the day. This is also called locked market. Daily price limit is set to minimize the chance of market manipulation so there won’t be any artificial price trend on specific commodity. This is normally called fluctuation limit of the day on given instruments. This is also useful for circuit breaker on given commodity.

Position limit and exposure limit:

Any given contract can’t be taken exceeding the limit of position at a price and at a time. Maximum position in one price and at a time is defined by exchange to protect market fairness. If any trader is willing to take more than permitted quantity of buy/sell orders/he needs to wait for next price and time. That helps to protect market from manipulator. That limit may vary on product to product basis.

Exposure limit is related to ensure financial soundness of trader and its broker. Party of trade and its clearing entity should ensure that in any case they will not get default to fulfill the commitment that is expressed in trade. So before to enter in any order or purchase or sell its necessary to check his/her exposure capacity based on his/her financial exposure expressed on his/her trading or collateral account. On automated trading system it’s performed by system itself taking some millisecond time.

Daily and Final Settlement

On the daily basis open position are settled by calculating the daily settlement price. Here, the calculation methodology for the daily settlement price is included in the trading rules. Similarly, the on expiry of the futures contracts, the settlement of the contract is performed by the exchange specified final settlement technique as mentioned in the trading rules. Here the single price is derived which shall be used to calculate the final adjustment for the particular contract.

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