NATIONAL COMMODITY & DERIVATIVES EXCHANGE LIMITED

Circular No. : NCDEX/RISK/2003/1

Date of Issue: December 2, 2003
Subject: Margins and Limits
In pursuance of the Bye- laws, Rules and Regulations, the Exchange has defined
norms and procedures for margins and limits applicable to Members and their
clients.
1.1.

Initial Margins

Amount of money deposited by both buyers and sellers of futures contracts to

ensure performance of trades executed. Initial margin shall be payable on all open
positions of Trading cum Clearing Members, up to client level, at any point of time,
and shall be payable upfront by the Members in accordance with the margin
computation mechanism and/ or system as may be adopted by the Exchange from
time to time.
Initial Margin shall include SPAN margins and such other additional margins that may
be specified by the Exchange from time to time.
1.2.

Computation of Initial Margin

The Exchange has adopted SPAN (Standard Portfolio Analysis of Risk) system or
may adopt any other system for the purpose of real-time initial margin computation.
Initial margin requirements shall be based on 99% VaR (Value at Risk) over a one-day
time horizon. The detailed methodology of calculation of initial margin is given in
Annexure 1.
Initial margin requirements for a Member for each contract shall be as under:
a. For client positions shall be netted at the level of individual client and grossed
across all clients, at the Member level, without any set-offs between clients.
b. For proprietary positions - shall be netted at Member level without any set-offs
between client and proprietary positions.
For the purpose of SPAN Margin, various parameters, or such other parameters as
may be specified from time to time shall be as specified as under:
1.2.1. Price Scan Range
Price Scan Range will be four standard deviations (4 sigma) as calculated for VaR

SPAN is a registered trademark of the Chicago Mercantile Exchange, used herein under
License obtained by NSCCL from CME. The Chicago Mercantile Exchange assumes no
liability in connection with the use of SPAN by any person or entity.
1 / 18

purpose for the prices of futures contracts or such other Price Scan Range as may be
specified by the Exchange from time to time. The minimum margin percentages for
various commodities shall be as specified in the following table or as may be
specified by the Exchange from time to time:
Commodity
Pure Gold Mumbai
Pure Silver New Delhi
J34 Medium Staple Cotton Bhatinda
S06 L S Cotton Ahmedabad
Soybean Indore
Refined Soya Oil Indore
Rapeseed Mustard Seed Jaipur
Expeller Rapeseed Mustard Oil Jaipur
Crude Palm Oil Kandla
RBD Palm Olein Kakinada

Minimum margin percentage

4
4
3
3
4
4
4
4
4
4

1.2.2. Volatility scan range

Volatility Scan Range will be taken at 2% or such other percentage as may be
specified by the Exchange from time to time.
1.2.3. Calendar Spread Charge
Calendar spread is defined as the purchase of one delivery month of a given futures
contract and simultaneous sale of another delivery month of the same commodity on
the same Exchange.
Margin shall be charged on all open calendar spread positions at 2% on the higher
value of the near month or the far month position, or at such rate as may be specified
by the Exchange from time to time. The near month position is the buy/sell position
on the calendar-spread position that expires first. The far month position is the
buy/sell position on the calendar-spread position that expires next).
A calendar spread position will be treated as non-spread (naked) positions in the far
month contract, 3 trading days prior to expiration of the near month contract.
However, calendar spread position shall be reduced gradually at the rate of 33
1/3%per day for three days or at such rate as may be prescribed by the Exchange
from time to time. The reduction of the spread position shall start five days before
the date of expiry of the near month contract.
1.3.

Mode of payment of initial margin

Margins can be paid by the Members in cash or in collateral security deposits in the
form of bank guarantees, fixed deposits receipts and approved Government of India
securities.
1.4.

Payment of initial margin

The initial margin shall be payable upfront by Members.

2 / 18

1.5.

Effect of failure to pay initial margins

Non-fulfillment of either the whole or part of the initial margin obligations will be
treated as a violation of the Rules, Bye-Laws and Regulations of the Exchange and
will attract penal charges as stipulated by NCDEX from time to time. In addition, the
Exchange may, within such time as it may deem fit, withdraw any or all of the
membership rights of a Member including the withdrawal of trading facilities of the
Members clearing through such Clearing Members, without any notice.
In addition, the outstanding positions of such Members and/ or constituents clearing
and settling through such Members, may be closed out forthwith or any time
thereafter at the discretion of the Exchange, to the extent possible, by placing
counter orders in respect of the outstanding position of Members without any notice
to the Member and/ or constituent, and such action shall be final and binding on the
Members and/ or constituents. The Exchange may also initiate such other risk
containment measures as it deems fit with respect to the open positions of the
Members and / or constituents.
The Exchange may, in addition to the foregoing provisions, take additional measures
like imposing penalties, collecting appropriate deposits, invoking bank guarantees/
fixed deposit receipts, realizing money by disposing off the securities and exercising
such other risk containment measures as it deems fit and may further take such
disciplinary action as it may deem fit and appropriate in this regard.
1.6.

Exposure Limits

This is defined as the maximum open positions that a Member can take across all
contracts and is linked to the Liquid Net Worth of the Member available with the
Exchange.
The Member will not be allowed to trade once the Exposure limits have been
exceeded on the Exchange. The Trader workstation of the Member will be disabled
and trading will be permitted only on enhancement of Exposure limits by deposit of
Additional Capital.
1.6.1. Liquid Networth
Liquid Networth shall be computed as effective deposits less initial margin payable at
any point in time. The Liquid Networth maintained by the Members at any point in
time shall not be less than Rs.25 lakhs (referred to as Minimum Liquid Net Worth) or
such other amount, as may be specified by the Exchange from time to time
1.6.2. Effective Deposits
All deposits made by the Members in the form of cash or cash equivalents form the
effective deposits. For the purpose of computing effective deposits, cash equivalents
mean bank guarantees, fixed deposit receipts and Government of Indian securities.
1.6.3. Method of computation of Exposure Limits
Exposure limits shall be specified as a multiple (x) of the liquid net worth. i.e. a
Member can have an exposure limit of x times his liquid net worth.. The multiple (x)
shall be as specified hereunder or as may be prescribed by the Exchange from time
3 / 18

to time:
Commodity
Pure Gold Mumbai
Pure Silver New Delhi
J34 Medium Staple Cotton Bhatinda
S06 L S Cotton Ahmedabad
Soybean Indore
Refined Soya Oil Indore
Rapeseed Mustard Seed Jaipur
Expeller Rapeseed Mustard Oil Jaipur
Crude Palm Oil Kandla
RBD Palm Olein Kakinada

Multiple (x)
25
25
40
25
25
25
25
25
25

1.6.4. Exposure limits for calendar spread positions

In case of calendar spread positions in futures, contracts shall be treated as open
position of one third of the value of the far month futures contract. However the
spread positions shall be treated as a naked position in far month contract three
trading days prior to expiry of the near month contract.
1.7.

Imposition of additional margins and close out of open positions

As a risk containment measure, the Exchange may require the Members to make
payment of additional margins as may be decided from time to time. This will be in
addition to the initial margin, which are or may have been imposed from time to
time. The Exchange may also require the Members to reduce/ close out open
positions to such levels and for such contracts as may be decided by it from time to
time.
1.8.

Failure to pay additional margins

Non-fulfillment of either the whole or part of the additional margin obligations will be
treated as a violation of the Rules, Bye-Laws and Regulations of the Exchange and
will attract penal charges as stipulated by NCDEX from time to time. In addition and
without prejudice to the foregoing, the Exchange may, within such time as it may
deem fit, withdraw any or all of the membership rights of the Members including the
withdrawal of trading facilities of Trading Members clearing through such Members,
without any notice.
In addition, the outstanding positions of such Members and/ or constituents, clearing
and settling through such Members, may be closed out forthwith or any time
thereafter, at the discretion of the Exchange, to the extent possible, by placing
counter orders in respect of their outstanding positions without any notice to them
and/ or constituent, and such action shall be final and binding on the Members and/
or their constituent. The Exchange may also initiate such other risk containment
measures as it deems fit with respect to the open positions of any Member and / or
his constituent.

4 / 18

The Exchange may, in addition to the foregoing provisions, take additional measures
like, imposing penalties, collecting appropriate deposits, invoking bank guarantees/
fixed deposit receipts, realizing money by disposing off the securities and exercising
such other risk containment measures as it deems fit and may further take such
disciplinary action as it may deem fit and appropriate in this regard.
1.9.

Return of Excess Deposit

Members may request the Exchange to release excess deposits held by it or by a

specified agent on behalf of the Exchange. Such requests may be considered by the
Exchange if it chooses not to exercise its lien pursuant to the Bye-laws, Rules and
Regulations, after adjustment of amounts, if any, payable by the Members to it for
the due fulfillment of all obligations and liabilities arising out of or incidental to any
deals made by such Members and/or constituents clearing and settling the deals
through the Member, subject to the Bye-laws, Rules and Regulations of the Exchange
or anything done in pursuance thereof.
1.10.

Initial Margin Deposit or Additional Deposit or Additional Base Capital

Members who wish to make a margin deposit (additional base capital) with the
Exchange and/or wishes to retain deposits and/or such amounts which are
receivable by them from the Exchange, at any point of time, over and above their
deposit requirement towards initial margin and/or other obligations, may inform the
Exchange as per procedure and format detailed in the circular for Base Capital
A Member who has authorized the Exchange to debit his clearing account towards
additional base capital shall ensure due performance of the commitment. Nonfulfillment of such obligation will be treated as a violation and/ or non-performance of
obligations and shall attract consequences, penalty and/or penal charges as
applicable to violations.
1.11.

Position Limits

Position wise limits are the maximum open position that a Member or his
constituents can have in any commodity at any point of time. This is calculated as
the higher of a specified percentage of the total open interest in the commodity or a
specified value. Open Interest is the total number of open positions in that futures
contract multiplied by its last available traded price or closing price, as the case may
be.
1.11.1. Position Limit at Member Level
Each Member shall ensure that his individual open interest in any commodity does
not exceed at anytime, 15 % of the open interest in all contracts on the same
commodity or the value specified for each commodity, whichever is higher. Such
value for each commodity shall be as specified as under or as may be prescribed by
the Exchange from time to time.

5 / 18

Commodity
Pure Gold Mumbai
Pure Silver New Delhi
J34 Medium Staple Cotton Bhatinda
S06 L S Cotton Ahmedabad
Soybean Indore
Refined Soya Oil Indore
Rapeseed Mustard Seed Jaipur
Expeller Rapeseed Mustard Oil Jaipur
Crude Palm Oil Kandla
RBD Palm Olein Kakinada

Position limit (Rs. Crores)

200
50
40
40
40
40
40
40
40

If any Member fails to comply with these limits, such Member/ participant shall be
liable for action for violating the limit as specified hereinafter in item Violation.
1.11.2. Position Limits at constituent Level
Each constituent of a Member shall ensure that his individual open interest does not
exceed at anytime, 10 % of the open interest in all contracts on the same commodity
or the value specified for each commodity, whichever is higher. Such value for each
commodity shall be as specified herein under or as may be prescribed by the
Exchange from time to time.
Commodity
Pure Gold Mumbai
Pure Silver New Delhi
J34 Medium Staple Cotton Bhatinda
S06 L S Cotton Ahmedabad
Soybean Indore
Refined Soya Oil Indore
Rapeseed Mustard Seed Jaipur
Expeller Rapeseed Mustard Oil Jaipur
Crude Palm Oil Kandla
RBD Palm Olein Kakinada

Position limit (Rs. Crores)

100
25
20
20
20
20
20
20
20

It shall be mandatory for Members to ensure that their individual clients trading/
clearing through them comply with the above limits. Violation of such limits shall
attract action as specified hereinafter in Item Violation.
1.12.

Intra- Day Price Limit

The maximum price movement during a day shall be +/- 10% of the previous days
settlement price prescribed for each commodity. If the price hits the intra day price
limit (at upper side or lower side), there will be a cooling period of 15 minutes.
During the cooling period trading in that particular contract will be suspended and
normal trading will resume after the cooling period. The base price when trading
resumes after cooling period shall be the last traded price before start of cooling
period. There would be no cooling period if the price hits the intra day limit during
6 / 18

last 30 minutes of trading.

1.12.1. Daily Settlement Price
The daily profit/losses of the Members are settled using the daily settlement price.
The Daily Settlement price notified by the Exchange by any method, shall be binding
on all Members and their constituents. The Daily settlement price shall be
determined in the manner described here under or in such other manner as may be
prescribed by the Exchange from time to time:
1.12.1.1.

Method 1

Daily Closing Session: There would be a closing session for 15 minutes after normal
market close time during which a single price call auction will be held. Orders shall
be received and the price that clears maximum volume of trade would become the
consensus price, which would be taken as the Daily Settlement Price. The
methodology used is explained in detail in Annexure 2.
Daily settlement price arrived at through this mechanism shall be valid only if order
for at least 15 contracts are executed by a minimum number of 5 constituents of
Members. On failure to meet this requirement, all the orders collected in the closing
session shall be cancelled and alternative methods given below shall be used to
determine the settlement price.
1.12.1.2.

Method 2

In the event of failure to get the daily settlement price through closing session, the
Exchange shall determine the same in the following order:
o

Value weighted Average Price (VWAP) of contracts during the last 30 minutes
trading of, if the number of contracts traded in last 0.5 hour is > 25 and the
number of clients who traded is >5.

VWAP during the last one hour of trading, if the number of contracts traded in
last 1 hour is >25 and the number of clients who traded is >5.

1.12.1.3.

Method 3

In the event of failures of both Methods 1 and 2, the Daily settlement price will be
determined as Theoretical futures price using formula F = Se rT where S= polled spot
price, r = 3 month MIBOR rate and t = time remaining till maturity
The Daily Settlement prices will be disseminated to Members through the Bhav Copy
at the end of the day. The Bhav copy contains prices for the day i.e. the Open, High,
Low and Close prices. The closing price in the Bhav copy will be the same as the
Daily Settlement Price as determined by the Exchange, except in cases where the
Daily Settlement Price is determined by calculating the theoretical futures price.
(given in Method 3 above). In such cases, the closing price in the Bhav copy will be
the last traded price or where no trades are present, it will be the same as the
previous days closing price.

7 / 18

1.12.2. Final Settlement Price

On the date of expiry, the final settlement price shall be the spot price on the expiry
day. The spot prices shall be collected from Members across the country through
polling. The polled bid/ask prices shall be bootstrapped and the mid of the two
bootstrapped prices shall be taken as the Final Settlement Price.
1.13.

Mark-to-market settlement

All the open positions of the Members shall be marked to market at the end of the
day and the profit/loss shall be determined as below:
a) On the day of entering into the contract, it is the difference between the entry
value and daily settlement price for that day
b) On any intervening days, when the Member holds an open position, it is the
difference between the daily settlement value for that day and the previous days
settlement price
On the expiry date if the Member has an open position, it is the difference
between the final settlement price and the previous days settlement price.
1.14.

Intra-day margin call

The Exchange at its discretion may make Intra day Margin calls as risk containment
measure if, in its opinion, the market price changes sufficiently. For example, if the
intra day price limit has been reached, or any other situation has arisen, which in the
opinion of the Exchange could result in an enhanced risk. The Exchange at its
discretion may make selective margin calls, for example, only for those Members
whose variation losses or initial margin deficits exceed a threshold value prescribed
by the Exchange.
1.15.

Delivery margin

In case of positions materializing into physical delivery, delivery margins shall be

calculated as X days VaR margins plus additional margins. X days refer to the
number of days for completing the physical delivery settlement. The number of days
(X) shall be commodity specific, as described hereunder or as may be prescribed by
the Exchange from time to time. There would be a mark up on the VaR based
delivery margin to cover for default.
Commodity
Number of days (X) for
physical settlement
Pure Gold Mumbai
2
Pure Silver New Delhi
4
J34 Medium Staple Cotton Bhatinda
S06 L S Cotton Ahmedabad
10
Soybean Indore
7
Refined Soya Oil Indore
7
Rapeseed Mustard Seed Jaipur
7
Expeller Rapeseed Mustard Oil Jaipur
7
8 / 18

Crude Palm Oil Kandla

RBD Palm Olein Kakinada

7
7

2. VIOLATIONS
2.1. The following requirements are prescribed for Members in the event of
Violations.
2.1.1. Non fulfillment of Initial Margin obligations
When the initial margin liability of a Member exceeds his effective deposit at any
time.
2.1.2. Non fulfillment of Mark to Market variations
When the Members fails to bring in the daily mark to market pay-in.
2.1.3. Non-fulfillment of settlement obligation
Upon non-fulfillment of settlement obligation towards settlement of contracts by the
scheduled date, by the scheduled time.
2.1.4. Exposure limit violation
When the exposure limit of Member exceeds his liquid net worth, at any time,
including during trading hours.
2.1.5. Member wise Position Limit violation
When the open position in all Futures Contracts of any Member on a particular
commodity exceeds the position limits as specified in this circular
2.1.6. Client wise Position Limit violation
When the open position in all futures Contracts of any constituent of a Member,
exceeds the position limit as specified in this circular. The Member through whom
the constituent trades/ clears his deals shall be liable for such violation.
In the event of a violation, Member shall immediately ensure,
(i)

That the client does not take fresh positions and

(ii)

Reducing the position of such clients within permissible limits.

The Exchange may, in addition to the foregoing provisions, take additional measures
like imposing penalties and may further take such disciplinary action as it may deem
fit and appropriate in this regard.
2.1.7. Violation arising out of misutilization of constituent collaterals and/ or deposits
When a Member utilizes the collateral of any constituent towards the exposure and/
or obligations other than for the same constituent.
2.2.

Compliance towards violations

9 / 18

Members, who have violated any requirement and/ or limits as specified in the Rules/
Bye-laws and Regulations, may submit a written request to the Exchange to either
reduce their open position or, bring in additional collateral deposits.
Members desiring to increase the collateral may do so through any or all of the
following modes:
i.

Deposit Cash - Submit a letter as per format given in the procedure for
Base Capital.

ii.

Deposit approved Government of India securities in demat form - Follow

procedure as per procedure for Base Capital.

iii.

Deposit Bank Guarantees - Follow procedure as per procedure for Base

Capital.

iv.

Deposit Fixed Deposit receipts - Follow procedure as per procedure for

Base Capital.

However, for violation of position limits by Members/ clients as specified in clauses

above, it shall be mandatory for the Members to comply with the requirements
specified therein.
2.3.

Effect of violations

In the event of a violation, the Exchange may, within such time as it may deem fit,
withdraw any or all of the membership rights of Members including the withdrawal
of trading facilities of all Members and/ or clearing facility of custodial participants
clearing through such Trading cum Members, without any notice.
In addition, the outstanding positions of such Member and/ or constituents clearing
and settling through such Member, may be closed out forthwith or any time
thereafter, at the discretion of the Exchange, to the extent possible, by placing
counter orders in respect of the outstanding position of Member without any notice
to the Member and/ or constituent, and such action shall be final and binding on the
Member and/ or constituent. The Exchange may initiate such other risk containment
measures as it deems fit with respect to the open positions of the Member and / or
constituent.
The Exchange may, in addition to the foregoing provisions, take additional measures
like, imposing penalties, collecting appropriate deposits, invoking bank guarantees/
fixed deposit receipts, realizing money by disposing off the securities, and exercising
such other risk containment measures as it deems fit and may further take such
disciplinary action as it may deem fit and appropriate in this regard.
2.4.

Reduction of Exposure by the Member through the Exchange

Reduction of Exposure through the Exchange can occur under the following
circumstances
1.
Where the Member has been disabled from trading on account of violation of
exposure limits
10 / 18

2.

Where the Exchange requires Members to close out their open positions, in all
contracts or in particular contracts due to any reason, as specified by the
Exchange

In such cases, the Member may place orders by giving instructions to the Risk
Management Group for closing out their positions on their behalf.
The Member is required to submit client-wise list of orders to the Risk management
group of NCDEX. The request for the order entry would be made through fax on the
designated fax numbers of the Risk Management group of the NCDEX. Such orders if
gets executed may reduce Members open position. Once the Members position is
reduced, the trading will be enabled and the Member may resume trading, with the
permission of the Exchange.
In such cases, the Exchange would not in any way be liable for any change in market
movements or prices or responsible for any losses occurring to the Member and/or
his clients.
The request for order entry is to be submitted in the format given in Annexure 3
2.5.

Penalty for violations and penal charges for non-payment

Without prejudice to the generality of the provisions contained in this circular, a

penalty as specified by the Exchange will be levied for each violation committed
under items above or any other specified limit. The penalty amount will be debited to
the clearing account of the Member on the next business day and the Member shall
be required to pay the same.
In respect of violation of initial margin limit and/ or open interest limit or any other
specified limit, on more than one occasion on the same day, each instance shall be
treated as a separate violation for the purpose of calculation of penalty.
The penalty, as indicated above, will be charged to Member irrespective of whether
the Member brings in margin deposits subsequently.
Non-payment of either the whole or part of the initial margin amount due and mark
to market variations will be treated as a violation of the Bye-laws, Rules and
Regulations of the Exchange and will additionally attract penal charges, as specified.
Where the penalty levied on a Member relates to a violation committed under items
of this circular, concerned Member may in turn recover such amount of penalty from
the concerned clients who committed the violation and became liable therefore.

For and on behalf of

National Commodity & Derivatives Exchange Limited

11 / 18

Meher Baburaj
Chief Operating Officer

12 / 18

ANNEXURE 1 - INITIAL MARGIN COMPUTATION METHODOLOGY

The initial margin would be calculated by the NSCCL system (PRISM) using SPAN *
which is portfolio based risk management system.
Basic objective of SPAN system
The objective of SPAN is to identify overall risk in a portfolio of futures contracts for
each Member. Because SPAN is used to determine performance bond requirements
(margin requirements), its overriding objective is to determine the largest loss that a
portfolio might reasonably be expected to suffer from one day to the next day by
constructing scenarios of probable changes in underlying prices and volatilities.
Mechanics of SPAN
The Clearing Corporation executes the calculations of SPAN. The results of these
calculations are called Risk arrays. Risk arrays, and other necessary data inputs for
margin calculation are then provided to Members in a file called the SPAN Risk
Parameter file. This file will be provided to Members on a daily basis.
Members can apply the data contained in the Risk parameter files, to their specific
portfolios of futures contracts, to determine their SPAN margin requirements.
SPAN has the ability to estimate risk for futures (and options) portfolios, and re-value
the same under various scenarios of changing market conditions.
The important steps of SPAN procedure are
(1) Risk Arrays: where it first calculates the underlying price moves under 16
scenarios and uses it to determine the corresponding price moves in the
derivatives (i.e. the deltas) for each of the listed contracts. Since for each
contract, the exchange will be calculating an array, of 16 numbers, hence the
name risk array.
(2) Scanning Risk: Then SPAN takes the losses in each of the 16 scenarios to get
the maximum loss that can occur.
(3) If a person has positions in more than 2 correlated commodities, SPAN is also
equipped to give an inter-commodity spread credit to reduce the margin of
the client.
To summarize, SPAN Margin = Scanning Risk Margin + Inter-Month Spread Margin Inter-commodity Spread Credit.
Risk Arrays
The SPAN risk array represents how a specific derivative instrument will gain or lose
value, from the current point in time to a specific point in time in the near future
(typically it calculates risk over a one day period called the 'look ahead time'), for a
specific set of market conditions which may occur over this time duration.
The specific set of market conditions evaluated, are called the risk scenarios, and
these are defined in terms of:
i.
How much the price of the underlying instrument is expected to change
over one trading day, and
ii.
How much the volatility of that underlying price is expected to change
13 / 18

over one trading day.

The results of the calculation for each risk scenario - i.e. the amount by which the
futures and options contracts will gain or lose value over the look-ahead time under
that risk scenario - is called the risk array value for that scenario. The set of risk array
values for each futures and options contract under the full set of risk scenarios,
constitutes the Risk Array for that contract.
In the Risk Array, losses are represented as positive values, and gains as negative
values. Risk array values are typically represented in the currency (Indian Rupees) in
which the futures or options contract is denominated.
SPAN further uses a standardized definition of the risk scenarios, defined in terms of
(i) the underlying 'price scan range' or probable price change over a one day period,
(ii) and the underlying price 'volatility scan range' or probable volatility change of the
underlying over a one day period.
These two values are often simply referred to as the 'price scan range' and the
'volatility scan range'. There are sixteen risk scenarios in the standard definition.
These scenarios are listed as under:
a. Underlying unchanged; volatility up
b. Underlying unchanged; volatility down
c. Underlying up by 1/3 of price scanning range; volatility up
d. Underlying up by 1/3 of price scanning range; volatility down
e. Underlying down by 1/3 of price scanning range; volatility up
f. Underlying down by 1/3 of price scanning range; volatility down
g. Underlying up by 2/3 of price scanning range; volatility up
h. Underlying up by 2/3 of price scanning range; volatility down
i. Underlying down by 2/3 of price scanning range; volatility up
j. Underlying down by 2/3 of price scanning range; volatility down
k. Underlying up by 3/3 of price scanning range; volatility up
l. Underlying up by 3/3 of price scanning range; volatility down
m. Underlying down by 3/3 of price scanning range; volatility up
n. Underlying down by 3/3 of price scanning range; volatility down
o. Underlying up extreme move, double the price scanning range (cover 35% of
loss)
p. Underlying down extreme move, double the price scanning range (cover 35% of
loss)
SPAN uses the risk arrays to scan probable underlying market price changes and
probable volatility changes for all contracts in a portfolio, in order to determine value
gains and losses at the portfolio level. This is the single most important calculation
executed by the system.
As shown above in the sixteen standard risk scenarios, SPAN starts at the last
underlying market settlement price and scans up and down three even intervals of
price changes ('price scan range').
At each 'price scan point', the program also scans up and down a range of probable
volatility from the underlying market's current volatility ('volatility scan range'). SPAN
calculates the probable premium value at each price scan point for volatility up and
14 / 18

volatility down scenario. It then compares this probable premium value to the
theoretical premium value (based on last closing value of the underlying) to
determine profit or loss.
After SPAN has scanned the 16 different scenarios of underlying market price and
volatility changes, it selects the largest loss from among these 16 observations. This
"largest reasonable loss" is the 'Scanning Risk Charge' for the portfolio.
Calendar Spread or Intra-commodity or Inter-month Risk Charge
As SPAN scans futures prices within a single underlying instrument, it assumes that
price moves correlate perfectly across contract months. Since price moves across
contract months do not generally exhibit perfect correlation, SPAN adds a Calendar
Spread Charge (also called the Inter-month Spread Charge) to the Scanning Risk
Charge associated with each futures and options contract. To put it in a different
way, the Calendar Spread Charge covers the calendar (inter-month etc.) basis risk
that may exist for portfolios containing futures and options with different expirations.
A calendar spread would be treated as a naked position in the far month contract
three trading days before the near month contract expires.

15 / 18

ANNEXURE 2 - SINGLE PRICE CALL AUCTION MECHANISM TO ARRIVE AT

CONSENSUS PRICE
If x is the clearing price, then volume clear at price X = Min (No of Bids >=X, No of
asks <=X)
CASE 1
For a contract, FUTCOM

GOLD

20SEP2003

Board Lot Quantity: 1

If the Bids & Ask placed are,
Bid

Ask

2@99

1@100

3@100

3@101

2@101

12@102

15@102

6@103

1@103

3@104

2@104

2@105

According to the Algorithm discussed earlier, the Max Tradable Quantity will be
calculated as 16 & the consensus price is at 102.
CASE 2
If the Bids & Ask placed are,
Bid

Ask

4000@95

3000@92

1000@94

2000@93

1000@92

1000@95

3500@91
Consensus

Cumulative

Cumulative

CB-CS

Price

Buy (CB)

95

4000

6000

-2000

4000

94

5000

5000

5000

93

5000

5000

5000

92

6000

3000

3000

3000

91

9500

9500

Sell (CS)

Volume
Tradable

16 / 18

For the above bids,

For the maximum volume tradable 5000, the consensus prices are found to be 93 &
94. The corresponding CB and CS also found to be same (i.e., CB-CS =0) for both the
prices, the Final Consensus Price will be calculated as the average of above prices.

Final Consensus Price = (93 + 94)/2 = 93.5

In general, the following is the formula for calculating the Consensus Price when CBCS is found to be Zero at more than one Price.
Consensus Price = price1 + price2 .+priceN
N
CASE 3
If the Bids & Ask placed are,
Bid

Ask

4500@96

1400@92

1000@95

200@94

200@94

1000@95

1000@92

8000@96

Consensus

Cumulative

Cumulative

Price

Buy (CB)

Sell (CS)

96

4500

10600

-6100

4500

95

5500

9200

-3700

5500

94

5700

9200

-3500

5700

9000

-2300

6700

93
92

6700
6700

8000

CB-CS

Volume
Tradable

-1300

6700

For the above bids,

For the maximum volume tradable 6700, the consensus prices are found to be 93 &
92. The corresponding CB is same but CS is not same (i.e., CB-CS = -2300 for 93 &
CB-CS = -1300 for 92). So, the Final Consensus Price is calculated on the basis of
non-tradable quantity (i.e., CB-CS) whichever is less.
In the above case,
At Price 93, the non-tradable quantity found to be 2300.
At Price 92, the non-tradable quantity found to be 1300.
Since 1300 < 2300,

Final Consensus Price = 92.

17 / 18

Annexure 3
Format for order entry request by the Member:
Date:
From
Name of the Member:
Code of the Member:
To
National Commodity Derivative Exchange Limited
C-1, Block G,
Exchange Plaza
Bandra Kurla Complex
Bandra(E), Mumbai 400051
Dear Sir
Please put the following GTD orders at the market price and confirm.
Sr.
No.

Client Id

Contract Symbol

Maturity Date

Quantity

Buy/Sell

Name of the authorized signatory:

Signature of the authorized signatory:

18 / 18