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What are margins and types of margins?

The margining system is based on the JR Verma Committee recommendations. The actual margining happens on a daily basis while online positions monitoring is done on an intra-day basis.

Daily margining is of two types:

  • Initial Margins
  • Mark to Market profit/loss

The computation of initial margin on the futures market is done using the concept of Value-at-risk (VaR). The initial margin amount is large enough to cover a one-day loss that can be encountered on 99% of the days. VaR methodology seeks to measure the amount of value that a portfolio may stand to lose within a certain horizon time period (one day for the clearing corporation) due to potential changes in the underlying asset market price. Initial margin amount computed using VaR is collected up-front.

The daily settlement process called \"mark to market\" provides for collection of losses that have already occurred (historic losses) whereas initial margin seeks to safeguard against potential losses on outstanding positions. The mark-to-market settlement is done in cash.

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