Extreme Loss Margin
Also written ELM · Extreme Loss Margin (ELM)
A flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
In plain language
The VaR margin is a statistical estimate: it covers the loss a stock is likely to suffer on a bad day, based on its history and volatility. Statistics, by construction, do not cover the days that have never happened before.
The Extreme Loss Margin is the buffer for those days. The workbook puts it plainly — it "aims at covering the losses that could occur outside the coverage of VaR margins".
It is deliberately simple. Where the VaR margin is recomputed through the day and differs from stock to stock, the Extreme Loss Margin shall be 3.5 per cent for any stock. One rate, every scrip, no modelling.
How it works
Margin exists because settlement is not instantaneous. Between the trade and the pay-in, prices move, and a buyer sitting on a loss becomes less willing to pay while a seller watching the price run up becomes less willing to deliver. Margin is the deposit that makes reneging expensive.
In the cash segment, the margin on equity shares is imposed daily and is the sum of three components:
| Component | What it covers | How it is set |
|---|---|---|
| VaR margin | Likely loss over the settlement period | A multiple of volatility, as a percentage of the stock price; updated at least five times each trading day |
| Extreme Loss Margin | Losses beyond the VaR estimate | Flat 3.5 per cent for any stock |
| MTM margin | The loss already incurred today | Transaction price against today's closing price; payable at the start of the next trading day |
Brokers collect margin from clients when the order is placed; stock exchanges collect from brokers when the order is executed. A trading member's liquid assets must at all times be enough to cover MTM losses, VaR margins, Extreme Loss Margins and Base Minimum Capital — and those liquid assets may be cash, fixed deposits, bank guarantees, government securities or exchange-traded securities.
If margin falls short, the consequence is immediate: the trading member's terminals are de-activated. Whatever residual risk survives all of this is backstopped by the Core Settlement Guarantee Fund.
The formula
Extreme Loss Margin = 3.5% × Value of the position
Total cash-segment margin = VaR margin + Extreme Loss Margin + MTM margin
A worked example
An investor buys 1,000 shares at Rs 450 on the exchange.
Position value = 1,000 × Rs 450 = Rs 4,50,000
Suppose the exchange's VaR margin rate for this stock, on this day, is 12.5 per cent (it is stock-specific and refreshed through the day; the ELM is not).
| Component | Rate | Rs |
|---|---|---|
| VaR margin | 12.5% | 56,250 |
| Extreme Loss Margin | 3.5% | 15,750 |
| Upfront margin at order placement | 16.0% | 72,000 |
The investor must have Rs 72,000 available with the broker when the order is placed — not the full Rs 4,50,000, which is due at pay-in.
The next day the stock closes at Rs 438. An MTM margin of 1,000 × Rs 12 = Rs 12,000 falls due at the start of the following trading day, on top of the Rs 72,000 already blocked.
Notice how the ELM behaves against the VaR margin. Take a quieter stock whose VaR rate is 8.5 per cent: total margin 12 per cent. Take a volatile one at 22 per cent: total 25.5 per cent. The Rs 15,750 of ELM does not move in either case — 3.5 per cent of position value, always. That fixed floor is precisely its purpose.
Why NISM asks about it
Chapter 4 (Secondary Markets), section 4.6.4 (Margins and cross-margining), where the three cash-segment margins are listed in order, and again in section 4.9.1 where liquid assets must cover MTM losses, VaR margins, Extreme Loss Margins and Base Minimum Capital. The ELM rate comes from SEBI's margin framework circular of 24 February 2020. Because 3.5 per cent is the only hard number in the section, it is the one most likely to be asked outright — typically "the Extreme Loss Margin shall be ___ per cent for any stock", or a question asking which of the three margins is the same for every scrip.
Common exam traps
- 3.5 per cent, flat, for any stock. It does not vary with volatility, with the client, or with the size of the position. If an answer option makes it stock-specific, that option is describing the VaR margin.
- ELM is additional to VaR margin, not an alternative to it. The cash-segment margin is the sum of VaR + ELM + MTM.
- This is the cash segment. The derivatives segment has its own margin structure — initial margin, exposure margin and assignment margin — and the 3.5 per cent figure belongs to the equity cash market.
- MTM margin is computed at the end of the day and payable at the start of the next trading day, not collected intraday like the upfront margins.
- Margins are returned once pay-in is completed. They are collateral against default, not a fee or a cost of trading.
- A margin shortfall de-activates terminals immediately and attracts a daily penalty on a pay-in shortfall. The consequence is operational, not merely financial.
Where this is taught
- Series IV · Chapter 7: Clearing, Settlement and Risk Management of IRDintroduced here
- Series XVI · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
- Series I · Chapter 7: Clearing, Settlement and Risk Management in ETCDintroduced here
- Series VII · Chapter 4: Risk Managementintroduced here
- Series XII · Chapter 4: Secondary Marketsintroduced here
Related terms
- Value at Risk (VaR) marginThe cash-market margin set as a multiple of a stock's volatility and expressed as a percentage of its price, so more volatile shares need a bigger upfront deposit; rates update at least five times a day.
- Assignment marginA margin collected on an option position for its final settlement obligation, on top of the initial, exposure and premium margins, levied until the pay-in towards exercise settlement is complete.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Exposure marginA derivatives-segment margin charged as a percentage of the notional value of an open position, on top of initial margin; on options it is collected only from sellers.
- Settlement Guarantee FundA fund held by the clearing corporation, built from contributions by the exchange, the clearing corporation and clearing members plus a share of settlement penalties, used to complete settlement if a member defaults.
- Central counterpartyThe clearing corporation that interposes itself in every exchange trade, becoming buyer to every seller and seller to every buyer, so neither side carries the other's credit risk.
- Gross open positionThe sum of long and short open positions across all clients of a trading or clearing member, added up without netting one client against another — the base figure position limits and extreme loss margin are computed on.
- Short Option Minimum MarginThe SPAN-computed margin charged to the writer of a commodity option, floored by SEBI-prescribed minimum volatility scan ranges so that a cheap option cannot be written on a trivial margin.
- Tender period marginAn extra margin charged at client level on all open positions once a contract enters its tender or delivery period — the higher of 20% of contract value, or 3% plus a five-day 99% VaR of spot prices.
- Devolvement marginA margin charged equally on buyers and sellers of Options on Futures over the last three days before expiry, so that ITM positions about to become futures already carry futures-level margin.
- Special marginAn extra margin an exchange levies on only one side of the open interest — buy or sell — to correct one-sided price momentum that threatens market integrity; SEBI's view is taken first.
- Intra-commodity spreadA long futures position in one contract month and a short position in another month (or a different lot size) of the same commodity, taken to profit from a change in the gap between them.
- Inter-commodity spreadA long futures position in one commodity and a short position in a different but economically related commodity for the same month — such as guar seed against guar gum — to trade the gap between them.
- Price Scan RangeThe probable one-day price change used in SPAN margining — based on 6 standard deviations, subject to a minimum percentage of the underlying (1.50% for USDINR).
- Margin on consolidated crystallized obligationPart of initial margin that blocks a client's net payable from closed-out futures profit or loss and option premium intraday, and all settlement obligations at end of day, until settlement.
- SPANThe scenario-based system clearing corporations use to compute initial margin — it revalues a client's whole derivatives portfolio under sixteen what-if scenarios and charges the worst loss.
- Margin pledgeThe only permitted way for a client to give securities as margin — a special pledge created in the depository system that leaves the shares in the client's own demat account instead of transferring them to the broker.
- Net Option ValueMarket value of a clearing member's long option positions minus its short option positions, added to (or subtracted from) its Liquid Net Worth so option gains and losses hit capital without cash settlement.
- Calendar spread chargeThe reduced margin on offsetting positions in the same underlying across different expiries: 1.75% of the far-month contract for index derivatives, 2.2% for single stock derivatives.
- Margin trading facilityA SEBI-regulated facility in which a stock broker lends part of the purchase price of eligible shares or equity ETFs to a client, holds the bought stock as pledged collateral and charges interest.
- Liquid assetsThe collateral a clearing member deposits with the clearing corporation, valued daily after haircuts, which must cover MTM losses, VaR margin, extreme loss margin and base minimum capital.
- Open positionAn outstanding, unsettled long (buy) or short (sell) position in a contract; margins, exposure limits, daily MTM and corporate-action adjustments are all applied to open positions.
- Ban periodThe state a derivative security enters once its market-wide Open Interest exceeds 95% of the Market Wide Position Limit, during which members and clients may only trade to reduce their positions.
- Mark to Market (MTM) loss marginIn the cash segment, one of three margins a clearing corporation collects upfront: the loss on a member's outstanding settlement obligations, marked to the closing price, grossed across all clients.
- Scrip sigmaThe volatility of an individual security, computed as of the previous trading day's close using an exponentially weighted moving average of daily returns, that drives its VaR margin rate.
- MarginThe money a buyer or seller must deposit before a trade is allowed to stand, so that the clearing corporation is covered if they fail to bring in funds or to deliver securities.
- Circuit breakerA pre-set percentage move in a stock or index that triggers an automatic halt or limit in trading, giving the market time to assess instead of trading on panic.