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

In the context of a stockbroker's risk management framework, what is the main purpose of the Value at Risk (VaR) margin collected from clients on cash market trades?

VaR margin is collected to cover the potential loss on a position in the period needed to close it out, estimated at a given confidence level. It protects the broker and clearing corporation against client default, and is not related to brokerage, dividends or closing prices.

  1. ATo cover the potential loss in the value of a position over the time taken to liquidate it, at a given confidence levelCorrect
  2. BTo pay the brokerage and statutory charges on the trade
  3. CTo guarantee the dividend entitlement of the buyer
  4. DTo fix the closing price of the security for the day

Explanation

VaR margin is a statistical estimate of the likely maximum loss on a security over a short horizon at a stated confidence level. It is collected upfront so that the loss on a defaulting client's position can be absorbed. It has nothing to do with charges, dividends or closing price determination.

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