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RiskManagement Framework

Submitted By

Anuj Goyal

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Key Goal and Tasks of Risk Management

The key goal of risk management is finding the optimum balance between the Exchanges growth, its

profitability and risks, as well as ensuring sustainable development of the Exchange in pursuance of its strategic

plans and achievement of set goals.In the course of implementation of its strategic goals, the Exchange:

does not risk more than allowed by the equity or commodities;

does not create risky situations to gain excess profit; keeps risks under control; creates necessary reserves for covering risks; establishes permanent survey of changes in risks; prevents occurrence of risky situations Effective use of capital.

Organizational structure of the Exchanges Risk Management

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Risk Management Department is a structural unit of the Exchange maintaining and coordinating the entire

process of the Exchanges risk management in prompt mode. The Risk Management Department carries out the

following responsibilities:

Information support of the Exchanges risk management, preparation of reports on risk events for theManagement Board, Board of Directors and the authority;

Arranging for activities at the Exchange on identification, analysis, evaluation and management ofcorporate risks, as well as monitoring of measures on management of risks assigned to risk owners

Introduction of internationally recognized standards for risk management at the Exchange for thepurpose of compliance with requirements of the World Federation of Exchanges for risk. Management

Key Process Steps

Risk management is a continual process that involves the following key steps:

Major risk of Exchange : Stock exchanges have a major role to play in building investors` confidence and

protecting them against excessive risk exposure the exchanges try to do this through self-regulation but where

discrepancies appear, the regulatory authorities need to step in .According to my knowledge Major risk face by

exchange are as follow :

Portfolio risk Entity risks Systemic risks

Interest rate risk Operational risk Risk of negative spill over effects from other

industries

Market risk Management risk Risk of economic downturn

Credit or counterparty risk Compliance risk

Financial risk Financial risk

Liquidity risk Legal and regulatory risk

Mismatch risk etc Strategic risk

Risk

ManagementPlanning

Risk

Identification

Qualitative

Risk Analysis

Quantative

Risk Analysis

Risk Response

Planning

Risk

Monitoring

and control

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Framework for Risk Management

The liquid assets placed by the members with exchange /clearing corporation as collateral plays a significant

role in risk management. All the liquid assets need to fulfill the below criteria laid down by SEBI at all point of

time to qualify:

1.MTM (Mark to Market) Losses

: Mark to market losses on outstanding settlement obligations of

the member.

2. VaR Margins: Value at risk margins to cover potential losses for 99% of the days.3. Extreme Loss Margins (ELM): Margins to cover the expected loss in situations that lie outside the

coverage of the VaR margins.

4. Base Minimum Capital: The base minimum capital shall be blocked from the liquid assets placedby the member with the Exchange/Clearing Corporation.

Apart from above mention guideline Exchange has to ensure market safety and security and to ensure smooth

and orderly completion of settlement of transactions it also include following things into its risk management

Framework

Disablement Enablement of Members in case of Members in case of settlement shortages/Marginviolations.

Generation of intraday risk Parameters. EPI computation processing in online margin systems Limits for collateral enhancements. Blockings of margins for shortages Stress Testing SGF Computation End of Day Margin Computation and Reports Generation Categorisation of securities based on liquidity Computation of exposures margin for stock futures Capital Cushion Computation Regulatory Reports