Risk Management Framework

Submitted By Anuj Goyal

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

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 the Management Board, Board of Directors and the authority; Arranging for activities at the Exchange on identification, analysis, evaluation and management of corporate 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 the purpose 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:

Risk Management Planning

Risk Identification

Qualitative Risk Analysis

Risk Monitoring and control

Risk Response Planning

Quantative Risk Analysis

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 Interest rate risk Entity risks Operational risk Systemic risks Risk of negative spill over effects from other industries Market risk Credit or counterparty risk Financial risk Liquidity risk Mismatch risk etc Management risk Compliance risk Financial risk Legal and regulatory risk Strategic risk Risk of economic downturn

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 placed by 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/Margin violations. 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