Common Terminology . . .

Margins
Margin is the cash balance (or security deposit) required from a futures trader.

Initial Margin
Mark to Market (M2M)
Margin Special Margin
Delivery Margin

Initial Margin:
Initial Margin is the returnable deposit required by Clearing House of the Exchange upfront before commencement of trading by members. The Margin requirement is calculated based on VaR (Value at Risk). Margin so calculated is reduced from the total margin of the member available with the exchange and accordingly further exposure is given on the balance amount.

The Exposure Limits are an integral part of risk management, which are determined in addition to initial margins. A member in order to trade further has to deposit Additional Base Capital with the Exchange to enjoy higher exposure limits. The cash component in the additional base capital must be at least 50% of the total Base capital. The minimum initial margin is around 4%. Hence the member gets approximately 25 times exposure of his deposit.

Example: Member can trade upto Rs. 50 Lacs on initial deposit for Rs. 2 Lacs. However as the initial margin is variable depending upon the market volatility, as the IM increases, the exposure shall decrease.

Mark to Market (M2M) Margins:
M2M is the practice of re-valuing an instrument to reflect the current values of the relevant market variables. It is a mechanism devised by the exchanges to minimize risk. All trades done on the exchange during the day and all open positions for the day are marked to closing price for the respective series and national gain or loss is worked out. Such loss/gain is debited/credited to respective member’s account. The formula to calculate the MTM margin is as under

MTM =(Series close -Trade price)*Trd qty * Multiplier

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The profits / losses calculated are based on the difference between the trade price and daily settlement price, which is closing price of the commodity future contract of the trading day.

In case one starts making losses in his position, exchange collects money to the extent of the losses daily at the close of the trading before opening of next day session. For example, if one buys futures at Rs. 400 and its price fall to Rs.395. Then he/she has to pay a M2M margin of Rs. 5. This is over and above the margin money that he/she pays to take a position in the future.

Final Settlement for commodity futures contracts is similar to the daily settlement process except for the method of computation of final settlement price. The Final Settlement price shall be the closing price of the series of the commodity on the last trading day of the futures contract.

Special Margins:
With a view to control price volatility, Exchange introduces the system of Special Margin. The amount of margin is directly related with the degree of volatility. Special Margins will be applicable on purchase / sale in case the price rise above falls below the Bench Mark Price respectively.

The Special Margin is imposed on the position outstanding on the day such volatility is observed. If the price moved beyond specified percentage, the amount of special margin is also imposed at a prescribed percentage.

Delivery Margins:
Delivery period refers to the last 15 days for contract maturity. As the delivery period for the contract approaches, NMCE requires the buyer and the sellers to post additional margins. The additional margins payable by the contracting parties starts from the 1st day of the contract maturity month.

Exposure Limits:
The limit for trading activity can be fixed by the Clearing Members (CM) for the Trading Members (TM). Exchange provides facility in the system enabling the CMs to select the commodities in which the TM can trade and also set the commodity wise limits for the TM. CM can also monitor the position of TMs online.

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