VaR margins in cash will make markets safer

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: The recent swings in the domestic market has required the capital market regulator Securities and Exchange Board of India (Sebi) to enforce the "new science of risk management", ie. Value at Risk (VaR) margining system. This system of margining is internationally accepted as the best margining system and is applicable on the outstanding positions of the members in all stocks.

Traditionally, volatility has been the most popular measure of risk, however the main problem with this identifier is that it does not care about the direction of an investment's movement: a stock can be volatile because it suddenly jumps higher.

Besides, for the investor class, risk is about the odds of losing money, and VaR is based on that common-sense fact. By assuming that investors care about the odds of a really big loss, VaR answers the question, "What is my worst-case scenario?" or "How much could I lose in a really bad month?"

Internationally VaR based margining system is being used for proper risk management. In India also we had shifted to VaR based margining system for equity segment.

However, with effect from July 10, 2006 the VaR margins in cash market also will be updated five times in a day, in line with derivatives segment of NSE. The specified measure taken by the regulator is definitely a welcome step as this will enable the exchanges to check volatility on an online basis and may increase margin in stocks having high volatility on immediate basis.