Policy Communication on Risk Management System

As per the exchange guidelines, stock brokers are required to have Risk Management System (RMS) policies. Accordingly, your broker, Kotak Securities, has its own RMS policy which is based on various parameters to keep the Margin of Safety, and is designed to avoid sudden shocks arising out of Market Risk, Liquidity Risk, Concentration risk, Credit risk etc.

Accordingly, stocks are classified in six categories based on our internal analysis. Maximum allowable value of stocks under various categories are defined with the applicable threshold and haircuts. The same is illustrated in the table below.

Sr. No. Stock Maximum limit (Lower of) Haircut applicable Effective Valuation of securities after applying Haircut
1
Category 'A'
Rs.75 Crores or 25% of ADV
15%
85%
2
Category 'B'
Rs.50 Crores or 50% of ADV
20%
80%
3
Category 'C'
Rs.10 or 100% of ADV
30%
70%
4
Category 'D'
Rs.2.50 Crores or 200% of ADV
40%
60%
5
Category 'D1'
Rs.1 crore or 300% of ADV
50%
50%
6
Category 'E'
Nil
100%
0%

*ADV stands for Average Daily Volume. i.e lower of average turnover of the stocks with a comparison to past 5 days and 30 days turnover.

Haircut is the factor that is applied by us on any security provided by a client, before considering it as margin. This acts as a buffer for price volatility of the stock.

Effective valuation means the net margins that will be provided on your securities after the applicable haircuts. A haircut of 15% would mean that if you pledged Category ‘A’ stocks worth Rs.1 lakh, Rs.85,000 (85% of 1 lakh) will be considered as collateral margin to your trading account.

Kindly note that we may repledge the securities in favor of Clearing Corporation as the same would be used as collateral margin for your positions. We may also not be able to accept stocks beyond exchange specified limits for repledge.

For a list of stock categories and applicable haircuts, you are requested to visit our website.

The policy permits companies to review and allow special terms based on Clients Proposal, Financials, Portfolio Quality, Credit history, etc. After considering the aforementioned risk factors, KSL can approve such special exposure, Margin requirement percentage, etc. to any customer.

Below is an example of the most common Policy terms.

1. Category wise Single stock exposure Cap- The exposure amount will be applicable to each SCRIP in the selected category

  • Example: if your approval mentions that
  • Single stock exposure for Category ‘D’ is capped at Rs. 2.00 crores.
  • It implies that all stocks in your portfolio which are Category ‘D’ as per Kotak Securities, Rs. 2.00 crore value of stock to be considered for exposure per scrip.

2. Full Category Level Cap - The exposure amount will be applicable at overall category level i.e Total of ALL SCRIPS in the selected category.

  • Example: if your approval mentions that
  • Full Category Level Cap forCategory ‘D’ is capped at Rs. 5.00 crores.
  • It implies that the total value of all stocks in your portfolio which are Category ‘D’ as per Kotak Securities, is capped at Rs. 5.00 crores for Exposure purpose.

3. Maximum Exposure per Scrip- The exposure amount will be applicable for the Selected Scrip. i.e. this is the max exposure amount for that scrip

  • Example: if your approval mentions that
  • ABC Petrochem Ltd exposure is approved for Rs.10.00 crores
  • It implies that stock named as ABC Petrochem Ltd which is Category ‘D,’ its max exposure is capped at Rs. 10.00 crore

Example: - Exposure Capping for D-Category stocks. Same can be applied to any category of stock as per approved terms

Sr. No. Stock Name KS Stock Category Exposure Value of your stock (Rs.) Max Eligible Exposure approved as per special terms(Rs.) Exposure Capping Criteria Haircut % Margin value after applying Haircut
1
ABC Petrochem Ltd
D
120,000,000
100,000,000
Maximum Exposure per Scrip
40%
60,000,000
2
XYZ Pharma Ltd
D
30,000,000
20,000,000
Category wise Single stock exposure Cap
40%
12,000,000
3
Happy Bank Ltd
D
10,000,000
10,000,000
Category wise Single stock exposure Cap
40%
6,000,000
4
Fun Beverages Ltd
D
25,000,000
20,000,000
Category wise Single stock exposure Cap
40%
12,000,000
5
Kitkat Ltd
D
5,000,000
0
Full Category Level Cap
40%
0

Note: The above is an example of Maximum exposure given that it meets liquidity criteria i.e. Daily Volume/Turnover criteria as per Kotak Securities’ approved terms.

Derivatives Exposure –

In the Derivatives segment, exposure includes both Futures and Options. Exposure constitutes Futures Long, Futures Short and Options Short. Exposure will mean the aggregate of the outstanding Futures Long, Futures Short and Options Short.

Approved exposure means quantum of open directional exposure. If a client hedges his/her position, he/she may take exposure beyond the approved value, till the time hedged exposure is within approved limits.

While computing the open exposure, we may reduce such hedged position from exposure such that only one sided exposure is considered while arriving at your open positions.

Hedging in simple terms means an investment that is made with the intention of reducing the risk of adverse price movements in an asset. Given below are a few examples on hedge, for your understanding in how we calculate exposures after considering hedge:

  1. A long Futures contract against a short Futures contract of a different expiry month is called a Calendar hedge (for obvious reasons). In such cases we try to knock off the entire exposure to zero. Even the Exchange charges substantially low margins on this kind of position.
  2. If you have Futures long against Call Short positions, we take higher of the two as exposure. Typically making your directional exposure value to be about half of what it looks.
  3. Similarly, if you have PUT Short against Call Short/Futures Short positions, here too, we take higher of the two as exposure.

For further clarifications, kindly contact your relationship manager or any of our branches.