Scrip sigma
The 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.
In plain language
Not every stock moves the same amount from day to day. A steady large-cap blue chip might swing 1% on an average day; a small, thinly traded stock might swing 5% or more. Margin requirements have to reflect that difference, or a calm stock and a wild one would be treated identically.
Scrip sigma is the number that captures how wild a particular stock — a "scrip" — has been recently. It feeds directly into how much VaR margin the clearing corporation charges on that stock.
How it works
The workbook (Chapter 4, section 4.1.1.1) defines scrip sigma as the volatility of the security computed as at the end of the previous trading day, using the exponentially weighted moving average (EWMA) method applied to the daily returns of the stock price — the same method used in the derivatives market.
A higher scrip sigma feeds into a higher VaR margin rate for that security, subject to the workbook's liquidity-based floors: Group I (liquid) securities carry a VaR margin based on 6 sigma, subject to a minimum of 9%; Group II (less liquid) securities, 6 sigma, minimum 21.5%; and Group III (illiquid) securities, a flat 50% or 75% depending on trading frequency, rather than a sigma-based calculation at all.
Because it is recalculated using the previous day's close, scrip sigma — and the margin rate built on it — can change from one trading day to the next as a stock's recent volatility rises or falls.
A worked example
Two Group I (liquid) stocks are compared for VaR margin purposes on the same day.
| Stock | Scrip sigma (6σ) | VaR margin rate applied |
|---|---|---|
| Steady Industries Ltd | 5.2% | 9% (the Group I minimum applies, since 6σ is below it) |
| Volatile Metals Ltd | 14.8% | 14.8% (6σ exceeds the 9% floor, so the actual sigma-based figure applies) |
Steady Industries has been calm enough that its 6-sigma figure sits below the regulatory floor, so the 9% minimum takes over regardless of how low its actual volatility is. Volatile Metals has been swinging enough that its own 6-sigma figure, 14.8%, is the higher number and becomes its VaR margin rate.
A trader holding Rs 10 lakh of each stock therefore faces a VaR margin of Rs 90,000 on Steady Industries but Rs 1,48,000 on Volatile Metals — a direct result of the difference in scrip sigma.
Why NISM asks about it
Chapter 4 (Risk Management, section 4.1.1.1, VaR Margin) introduces scrip sigma as the volatility input to the VaR margin table, immediately after the liquidity categorisation of securities. Expect the definition tested directly — that it is computed from the previous day's close using EWMA, the same method as in derivatives — and the fact that its role is to feed the 6-sigma VaR calculation, capped below by the group floor.
Common exam traps
- Scrip sigma is computed at the end of the PREVIOUS trading day, not intraday and not for the current day itself.
- It uses EWMA, the same method as in the derivatives market — not a simple historical standard deviation.
- The VaR margin rate is 6 sigma, subject to a group-specific minimum — a very calm stock still cannot have a VaR margin below its group's floor (9% for Group I, 21.5% for Group II).
- Group III (illiquid) securities do not use a sigma-based rate at all — they get a flat 50% or 75% depending on how often they have traded.
- Do not confuse scrip sigma with the separate Price Scan Range used in SPAN margining for derivatives, even though both rely on a multiple of standard deviation — scrip sigma is the cash-segment VaR input.
Where this is taught
Free preparation for NISM Series VIIRelated terms
- Value at RiskA statistical estimate of the most a position is likely to lose over a set holding period at a chosen confidence level — the idea behind the initial margin a clearing corporation charges on a derivatives trade.
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
- 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.
- 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.
- ICMTMIntraday Crystallized Mark to Market Losses: a real-time margin on losses from trades that are both executed and squared off on the same day, computed at weighted average prices and collected as it accrues.