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Sebi introduces new norms for market
July, 28th 2009

The Securities and Exchange Board of India (Sebi) today introduced some new norms for the comprehensive risk management system for the equity markets in the cash segment.

Reducing the margin burden on stock brokers, Sebi has now clarified that in case of a buy transaction in cash market, value at risk (VaR) margins, extreme loss margins and mark to market losses together will not exceed the purchase value of the transaction.

The margin pressure on the value of any particular stock increases when the markets are highly volatile as the stock exchanges follow a standard procedure to calculate these margins. During extreme volatility when the margin pressure shoots up brokers often have to deposit more money with the exchanges, which is higher than the actual value of the stocks.

Stock exchanges calculate VaR and other margins based on a standard deviation formula.

Recently, when the markets rose 2,000 points after the General Elections, the margins on certain stocks shot up by over 100 per cent of the value of the stocks. Consequently, many brokers had found themselves in trouble.

However, the move would now reduce the margin burden on brokers at the time of high volatility in markets. Sebi has further said that in case of sale transactions the rules will continue and VaR margins and extreme loss margins together will not exceed the sale value of the transaction and mark to market losses will also be levied, if any.

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