Margin Period of Risk

Initial margin is meant to cover the loss a position could run up before the clearing corporation can close it out if a member defaults. That takes time — spotting the default, unwinding the position, hedging in the market — and the margin has to be sized for the risk over that whole window, not just for one day.

That window is the Margin Period of Risk (MPOR). The workbook's own words: "SEBI has advised Clearing corporation to estimate appropriate MPOR, subject to minimum of 2 days, for each equity derivatives product based on liquidity therein and scale up the initial margins." A thinly traded product takes longer to unwind safely, so it gets a longer MPOR — and a bigger margin.

MPOR is not a separate margin of its own — it is the time horizon that calibrates SPAN, the system used for real-time initial margin computation:

• SPAN's initial margin requirement is based on a worst scenario loss of a client's portfolio, generated across 16 "what-if" scenarios of price and volatility change.
• That worst scenario loss is calibrated to 99 per cent value at risk (VaR) — the maximum likely price change at a 99% confidence level.
• The time horizon over which that 99% VaR is measured is the Margin Period of Risk of each product.
• The clearing corporation sets MPOR product by product, based on the liquidity of that product, subject to a floor of 2 days — MPOR can be longer for a less liquid product, but never shorter than 2 days for any equity derivatives product.

So the chain runs: liquidity of the product → MPOR (≥ 2 days) → the horizon for 99% VaR → the SPAN worst-scenario-loss calculation → initial margin. A longer MPOR widens the price/volatility scenarios SPAN has to cover, which raises the margin — this is exactly how SEBI makes illiquid derivatives more expensive to carry than liquid ones, without touching the 16-scenario SPAN methodology itself.

Two equity derivatives products trade on the same exchange.

Both positions are the same notional value, say Rs 10 lakh, and both are run through SPAN's 16 scenarios at 99% VaR. Because the mid-cap future's MPOR is twice as long, SPAN's worst-scenario-loss calculation for it covers a wider range of possible price moves over that longer window — a position can drift further from today's price in 4 days than in 2. The initial margin on the mid-cap future comes out higher than on the index future of the same notional value, purely because of the liquidity difference driving a longer MPOR.

If the mid-cap stock's liquidity improves over time, the clearing corporation can shorten its MPOR back towards the 2-day floor — but never below it, however liquid the product becomes.

Chapter 4 (Risk Management), section 4.1.2.1 (Initial Margin Computation), introduces MPOR in the same breath as the 99% VaR standard and the SPAN methodology, immediately before the "Updation of Risk Parameters" sub-section. Expect the 2-day minimum as a direct recall fact, and a question on what MPOR actually calibrates — the time horizon for the 99% VaR that feeds SPAN, not a margin amount in itself.

• 2 days is a floor, not a fixed value. MPOR is estimated per product based on liquidity, and can be longer; it is never shorter than 2 days for an equity derivatives product.
• MPOR is a time horizon, not a margin. It is one input into how SPAN's 99% VaR is measured, not a separate rupee amount added to initial margin.
• Less liquid means a longer MPOR, and a longer MPOR raises margin. The direction of the relationship is the examinable part.
• Do not confuse MPOR with the "at least 5 times a day" Scenario Contract Value update frequency — that is how often SPAN's scenario valuations are refreshed within the day; MPOR is the multi-day horizon of the VaR calculation itself. They are different numbers answering different questions.
• MPOR is set product by product, not once for the whole market.