NISM-Series-VII: Securities Operations and Risk Management · Risk Management

VaR Margin, ELM and Initial Margin Explained

Updated 11 October 2026 · Fact-checked

Margins are deposits collected from members to cover the risk of default. Initial margin in the cash market is VaR margin plus extreme loss margin (ELM). Derivatives use SPAN-based initial margin plus exposure margin. Mark-to-market (MTM) margin is collected separately for losses already incurred. Solve questions by first identifying which risk each margin covers.

Understand Margining Systems: VaR, ELM and Initial Margin

A clearing corporation guarantees settlement of trades. To do that safely, it collects money up front from members, who in turn collect it from clients. This money is called margin. It protects the system if a member or client fails to pay.

Margins fall into two groups. Initial margin covers the loss that could happen in future if prices move against a position. Mark-to-market (MTM) margin covers the loss that has already happened on open positions because of today's price change.

In the cash market, initial margin has two parts. Value at Risk (VaR) margin covers the largest loss expected on a position over a given time horizon at a stated confidence level, in normal market conditions. VaR cannot cover a very large, rare move. Extreme loss margin (ELM) covers that gap. It is charged on top of VaR, as a percentage of the position value.

In the derivatives segment, initial margin is worked out using SPAN (Standard Portfolio Analysis of Risk). SPAN looks at the whole portfolio of a client. It simulates a set of price and volatility moves and takes the worst likely one-day loss as the margin. Offsetting positions, such as a spread, reduce the SPAN margin because the loss on one leg is partly covered by the gain on the other. Exposure margin is charged in addition to SPAN margin to cover extreme moves, much as ELM does in the cash market.

Margins are collected upfront and are not meant to be settled against profits. Members must collect them from clients, and the clearing corporation collects them from members. Shortfalls can attract penalties. Check the latest SEBI and exchange circulars for the current percentages, as these change. The exam tests concepts, so learn what each margin covers and when it applies.

Key formulas to remember

Cash market initial margin: Initial margin = VaR margin + Extreme loss margin (ELM); Both are charged upfront on the position value. VaR is based on a statistical model; ELM is a flat percentage.
ELM amount: ELM = ELM rate × Position value; The rate depends on the security and exchange circular. The exam gives you the rate.
Derivatives initial margin: Initial margin = SPAN margin + Exposure margin; SPAN is the portfolio-based worst-case loss. Exposure margin is added on top for extreme moves.
MTM margin: MTM loss = (Current price − Trade price) × Quantity, for a long position; For a short position the sign reverses. Only losses are collected as margin; gains are not paid out as margin.
Margin purpose: VaR / SPAN = normal-condition risk; ELM / Exposure = extreme-condition risk; MTM = loss already incurred; Use this to sort any conceptual question.

How to solve Margining Systems: VaR, ELM and Initial Margin questions

Use this method for any margin question, conceptual or numerical.

1Identify the segment: cash market or derivatives.
2Identify what the question asks: future risk (initial margin) or loss already booked (MTM margin).
3For cash market initial margin, list the two parts: VaR margin and ELM.
4For derivatives, list SPAN margin and exposure margin. Remember SPAN is portfolio-based.
5If a calculation is needed, compute each part using the rates given. Do not use rates from memory.
6Add the parts for initial margin. For MTM, compute price difference × quantity and take only losses.
7Check the answer options for trap values, such as a single component given as the total.

Quickest way: Match the margin to the risk

When to use it: Use for conceptual MCQs where you must pick the right margin type under time pressure.

Ask: is the loss future or already happened?
Future and normal conditions: VaR (cash) or SPAN (derivatives).
Future and extreme conditions: ELM (cash) or exposure margin (derivatives).
Already happened: MTM margin.
For totals, add the components and stop; do not add MTM into initial margin.

Common mistakes in Margining Systems: VaR, ELM and Initial Margin

Treating VaR margin and MTM margin as the same thing.
Both are collected from members and both relate to price moves.
Fix: VaR is forward-looking and charged upfront. MTM is backward-looking and covers losses already incurred.
Giving VaR alone as the cash market initial margin.
VaR is the more famous term, so students forget ELM.
Fix: Write initial margin = VaR + ELM every time.
Saying SPAN looks at each position separately.
Students assume margin is per contract.
Fix: SPAN is portfolio-based. Offsetting positions lower the margin.
Believing ELM covers normal price moves.
The word 'loss' appears in the name and sounds general.
Fix: ELM covers extreme moves that VaR may not capture. VaR covers normal conditions.
Memorising margin percentages as fixed.
Workbooks and circulars quote rates as examples.
Fix: Rates are revised by exchanges and SEBI. Use the rate given in the question and focus on the method.
Counting MTM gains as margin credit to withdraw freely.
Profit looks like spare money.
Fix: Remember MTM margin is collected on losses. Treat gains according to the rule stated in the question.

Worked examples

Example 1

A client buys shares worth ₹5,00,000 in the cash market. The VaR margin is 8% and the ELM is 3.5%. What is the total initial margin?

Show the solution

VaR margin = 8% × ₹5,00,000 = ₹40,000.
ELM = 3.5% × ₹5,00,000 = ₹17,500.
Initial margin = VaR + ELM = ₹40,000 + ₹17,500 = ₹57,500.

Answer: ₹57,500

Example 2

A client buys 200 shares at ₹500. At the end of the day the price is ₹485. What MTM margin is payable, and which of these does it cover: a future loss or a loss already incurred?

Show the solution

Price fall per share = ₹500 − ₹485 = ₹15.
Loss = ₹15 × 200 = ₹3,000.
The price move has already happened, so this loss is already incurred.
MTM margin therefore covers a loss already incurred, not a potential future loss.

Answer: MTM margin of ₹3,000, covering a loss already incurred.

Exam tips

Expect definition-style MCQs asking what each margin covers. Learn the one-line purpose of VaR, ELM, SPAN, exposure margin and MTM.
In numerical questions, the rates are given. Read them carefully and do not add MTM to initial margin.
Watch for options that name only one component as the total initial margin.
In series VII, a wrong answer costs 25% of the marks for that question, so skip if you cannot separate two close options.

Practice questions from Risk Management

Margining Systems: VaR, ELM and Initial Margin in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Margining Systems: VaR, ELM and Initial Margin: frequently asked questions

What is the difference between VaR margin and extreme loss margin?

VaR margin covers the largest expected loss in normal market conditions over a set horizon at a stated confidence level. ELM covers losses from extreme moves that VaR may not capture. Both are charged upfront in the cash market.

How is initial margin calculated in the cash market?

It is the sum of VaR margin and extreme loss margin, each applied to the position value using the prescribed rates. You apply the rates given in the question.

What is SPAN margin in derivatives?

SPAN is a portfolio-based method that finds the worst likely one-day loss across simulated price and volatility moves. Offsetting positions reduce the margin. Exposure margin is added on top.

What is the difference between VaR margin and mark-to-market margin?

VaR margin is collected upfront for possible future loss. MTM margin is collected for loss that has already occurred on open positions because of price changes.