Cash component
Also written Cash margin component
The part of a clearing member's collateral deposit held as cash, bank guarantees, fixed deposit receipts, T-bills or dated government securities — as opposed to the non-cash component.
In plain language
A clearing member has to keep collateral with the clearing corporation. That collateral is not all the same kind of asset — the workbook splits it into two buckets.
The cash component is the liquid bucket: cash, bank guarantees, fixed deposit receipts, T-bills and dated government securities. Everything else — mainly approved demat securities pledged as collateral — falls into the non-cash component instead.
The split matters because regulation fixes a minimum share that must be cash: a clearing member's total liquid assets must be at least 50% cash component, with the rest made up of the non-cash component.
How it works
Chapter 8, sections 8.3 and 8.4, set the rule: all collateral deposits members provide to become members of the F&O segment are segregated into cash component and non-cash component. A clearing member's liquid assets — the pool that covers margins and liquid net worth requirements — must comprise at least 50% cash component, the balance being non-cash component.
This 50% floor is what stops a clearing member from posting its entire deposit as pledged securities, whose value can itself fall in a crisis exactly when the clearing corporation needs to rely on it.
A worked example
A clearing member must maintain Rs 50 lakh of liquid net worth with the exchange.
At least 50% of that, Rs 25 lakh, must be cash component — say, Rs 15 lakh in a fixed deposit receipt and Rs 10 lakh in cash. The remaining Rs 25 lakh can be non-cash component, such as approved demat securities pledged with the clearing corporation.
If the member instead tried to hold Rs 40 lakh as pledged securities and only Rs 10 lakh as cash, it would fail the 50% cash-component test even though the total of Rs 50 lakh is unchanged.
Why NISM asks about it
Chapter 8, section 8.3, defines cash component and non-cash component together when listing collateral deposit requirements; section 8.4 repeats the 50% cash-component rule for liquid assets. Expect a question naming what counts as cash component (T-bills and dated government securities are the ones candidates most often miss) and the 50% minimum.
Common exam traps
- T-bills and dated government securities count as cash component, not non-cash — candidates often assume anything other than currency notes is non-cash.
- At least 50% cash component is a floor on liquid assets generally, not a rule that applies only to the initial margin.
- Non-cash component is mainly approved demat securities — the workbook gives no exhaustive list beyond this.
Check yourself
1.A clearing member must provide liquid assets covering his margins and liquid net worth requirements. What is the rule on their composition?
- a)They must be entirely in cash
- b)At least 50% must be cash component, and the rest may be non-cash component
- c)At least 50% must be non-cash component, and the rest may be cash component
- d)There is no prescribed composition — any approved collateral in any proportion is acceptable
Show the answer
Answer: (b) At least 50% must be cash component, and the rest may be non-cash component
The total liquid assets comprise of at least 50% of the cash component and the rest is non-cash component.
Note the definitions, because they are counter-intuitive. Cash component means cash, bank guarantee, fixed deposit receipts, T-bills and dated government securities. Non-cash component means all other forms of collateral deposits, like deposit of approved demat securities.
So a bank guarantee and an FDR count as cash component even though neither is currency. Candidates who classify them as non-cash will get every composition question wrong.
Option A over-states the rule — the whole point of allowing a non-cash component is that members need not tie up everything in cash.
Option C reverses it, which would defeat the purpose: the cash component exists because it can be realised immediately in a default.
Option D ignores the rule entirely.
Read at least 50% as a floor, not a split. A member holding 75% cash component is fully compliant; one holding 45% is not.
Where this is taught
Free preparation for NISM Series VIIIRelated terms
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Non-cash componentThe part of a clearing member's collateral deposit held as approved demat securities and other non-cash forms — capped so it cannot exceed 50% of total liquid assets.