What is Value at Risk (VAR), Extreme Loss Margin (ELM), and Ad-hoc Margins?

Value at Risk (VAR) is a margin designed to cover the largest possible loss on 99% of the days (99% Value at Risk). It is required to compensate for losses incurred as a result of volatile market conditions. It is usually higher on days of high volatility.

While historical volatility tells us how the security price moved in the past, VAR answers the question, “How much is it likely to move over the next day?"

Extreme Loss Margin (ELM) is charged over and above the VAR margin. Both form part of upfront margins charged by regulators. It covers the expected loss in situations that go beyond those envisaged in the 99% value at risk estimates used in the VAR margin. It is charged both in Cash Segment as well as Derivatives Segment, with the same name.

Ad-Hoc Margins are additional margins charged on specific stocks, over and above VAR and ELM, based on stock specific conditions set by the regulators.

Below are some of the types of ad-hoc margins.

1. Additional margins for high volatility stocks

These margins are charged based on the magnitude of intra-day price movements over the last few trading sessions.

2. Delivery Margins

Delivery margins are charged on the Derivatives positions in Stock (Not Index) Futures & Options which are expected to be settled physically on the Derivatives Expiry Day. It gets charged 4 days prior to the Derivatives Expiry Day.

Delivery margins shall be computed as per the margin rate applicable in Cash Market segment (i.e VAR, Extreme Loss Margins) of the respective security.

To know the margins % required in various segments, please click here.