Non-cash component
The 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.
In plain language
Not all of a clearing member's collateral has to be cash-like. Some of it can be approved demat securities pledged as collateral instead — that portion is the non-cash component.
The workbook does not give a long list of what qualifies; it describes non-cash component as "all other forms of collateral deposits like deposit of approved demat securities" — meaning everything that is not cash, a bank guarantee, a fixed deposit receipt, a T-bill or a dated government security.
The non-cash component cannot dominate a member's deposit: at least half of a clearing member's liquid assets must be the cash component, so the non-cash component is capped at at most 50%.
How it works
Chapter 8, section 8.3, introduces the split alongside cash component; section 8.4 gives the operative rule: a clearing member's total liquid assets must comprise at least 50% cash component — which, read the other way, caps the non-cash component at no more than 50%.
The reason for the cap is risk quality. Pledged securities can lose value in the same market stress that triggers a default, so the clearing corporation will not let a member rely on non-cash collateral for more than half its liquid net worth.
A worked example
A clearing member holds Rs 1 crore of total liquid assets with the clearing corporation: Rs 60 lakh in cash and fixed deposit receipts, and Rs 40 lakh in pledged demat securities.
Here the non-cash component is Rs 40 lakh out of Rs 1 crore, or 40% — within the 50% cap. If the member instead pledged Rs 55 lakh of securities against Rs 45 lakh cash, the non-cash component would be 55%, breaching the cap even though the Rs 1 crore total is unchanged.
Why NISM asks about it
Chapter 8, sections 8.3 and 8.4, define non-cash component and the 50% cap together with cash component. A question naming "at most 50%" or "not more than 50%" as the non-cash ceiling is testing this same rule from the other side.
Common exam traps
- The cap is on non-cash, expressed as a floor on cash — the workbook states the rule as "at least 50% cash component," so read it carefully when a question flips it to ask about the non-cash side.
- Non-cash component is approved demat securities and similar deposits, not unlisted or non-approved securities.
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.
- Cash componentThe 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.