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

In the context of a stock broker's risk management system, what is the main purpose of the Value at Risk (VaR) margin collected from clients in the cash segment?

VaR margin is collected to cover the potential loss on a position from adverse price movement over a defined horizon at a given confidence level. It protects the clearing corporation against member default and is not a charge, compensation or contribution to any fund.

  1. ATo cover the potential loss in a position arising from adverse price movement over a defined settlement horizonCorrect
  2. BTo pay the brokerage and statutory charges on the trade
  3. CTo compensate the investor for delayed pay-out of securities
  4. DTo fund the exchange's Investor Protection Fund

Explanation

VaR margin is a risk-based margin that estimates the likely worst loss on a security position over a given time horizon at a given confidence level. It is collected upfront so that the clearing corporation is protected if a member defaults. It is not a fee, a compensation or a fund contribution.

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