Operations and risk management

120 terms · each links to a full explanation with a worked example and the exam traps

Additional marginAn extra exchange margin levied on both the buy and sell side of a commodity contract to cool an overheated market; separately, a margin a broker may impose on risky clients or trades.
Algorithmic tradingAny order generated by automated execution logic rather than typed in by a person — software that pushes buy and sell orders into the exchange once its parameters are met.
Alternative Risk Management FrameworkA tougher SEBI margining regime for cash-settled contracts prone to near-zero or negative prices — pre-expiry margins rise 5% a day for the last five trading days once triggered, and spread margin benefit is withdrawn.
Auto-pledgeThe automatic creation of a pledge over a client's funded stock in favour of the "Client Securities under Margin Funding Account," without needing a specific pledge instruction from the client.
Back testingA clearing corporation's daily check of the margins it collected against the actual price changes that followed, run to test whether its margining models are set appropriately.
Bank mandateThe record of the bank account linked to an investor's trading, demat or mutual fund folio, used to move money in and out of investments; changed by submitting a form with a cancelled cheque.
Base Minimum CapitalThe deposit every trading member must keep with the exchange purely to meet contingencies — it earns the member no trading exposure at all, and its size depends on what kind of trading the member does.
BootstrappingThe statistical method exchanges use to clean spot price polling data — removing outlier quotes and repeatedly testing random selections until the final polled price has the least standard deviation against the full set.
Borrowing feesThe fee a fund pays to borrow securities so that it can take a short position — an additional cost of the short, quite separate from interest on borrowed cash.
Breach listThe list of listed Indian companies where combined foreign holding by FPIs, NRIs or the overall sectoral cap has hit its permitted ceiling, so an NRI cannot place a fresh buy order in that stock.
Business Continuity PlanThe plan a Category III AIF and its key service providers must have to keep operating through disruptions such as system failure or the loss of key personnel — no specific figure is given.
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.
Category A, B and C modificationsThe three-tier classification of commodity contract changes, from minor tweaks exchanges can make alone to material changes needing SEBI approval — each announced at least 10 days before taking effect.
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.
Concentration marginAn extra margin levied only on the clients whose buy- or sell-side open interest is concentrated relative to total open interest in a commodity or contract, rather than on the whole market.
Contract noteThe legal record of a trade a stock broker executed for a client on an exchange, issued within 24 hours in the exchange-prescribed format, physically or as a digitally signed electronic contract note.
Counterparty credit riskThe risk that the other party to an OTC derivative fails before the settlement date. It does not arise in exchange-traded derivatives, where the clearing corporation becomes central counterparty.
Counterparty riskThe risk of an economic loss because the other party to a contract fails to fulfil its obligation — acute in forwards, and removed for exchange-traded derivatives by the clearing corporation's guarantee.
CPMI-IOSCOThe joint global standard, from two international regulator bodies, that Indian commodity index futures and options risk management frameworks must conform to — behind the 99% VaR and 2-day margin period rules.
Cross margin benefitA margin offset of up to 75% for a client holding opposite positions in index futures and futures on that index's own constituents, similar to the crush margin benefit, allowed by SEBI's circular of 29 June 2021.
Cross marginingReduced margin on a client's positions in the cash and equity derivatives segments that offset each other, with only a spread margin of 25% to 40% of the normal margin charged.
Cyber resilienceAn organisation's ability to prepare for and respond to a cyber-attack, keep functioning during it and recover from it — the second half of SEBI's Cyber Security and Cyber Resilience Framework.
Cyber Security RiskThe risk that an AIF's or its service providers' systems are breached, corrupted or disrupted — governed by SEBI's Cyber Security and Cyber Resilience Framework, which all AIFs had to comply with by 31 August 2025.
Daily Price LimitThe band around the previous close within which a contract may trade during a day — a circuit filter that caps volatility, imposes a cooling-off pause, and can halt the contract for the session.
Day orderAn order valid only for the single trading day on which it is entered — if not executed by the end of the day, the trading system automatically cancels it.
Dealing teamThe team a portfolio manager must constitute to place and execute all orders under its written policies, working from a restricted dealing room with recorded lines and full audit trails.
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.
Direct Market AccessA facility, introduced by SEBI in 2008 for institutional investors, that lets a client send orders straight into the exchange trading system through the broker's infrastructure without manual intervention by the broker.
Disaster Recovery SiteA backup trading site an exchange activates to restore normal operations after an outage — the fallback that IRRA exists to cover for when both the primary platform and this site are disrupted.
Disclosed QuantityAn order condition that shows the market only part of the total quantity — once that visible slice trades, the next slice is automatically released, repeating until the whole order is filled.
DSCNBAThe bank account from which a stock broker or clearing member must pay funds to clients, named "Name of the SB/CM – DSCNB account" under SEBI's standardised bank account nomenclature.
Early warning signalsIndicators that stock exchanges, depositories and clearing corporations monitor to catch a stock broker's deteriorating finances or diversion of client securities early, triggering joint preventive action.
Electronic Contract NoteA contract note issued electronically instead of on paper — permitted only after the client's consent, given either through the client agreement or as a separate, standalone consent.
Empanelled polling participantsThe traders and commodity users an exchange formally registers to report spot prices from centres across the country, feeding the daily spot price polling process that underpins futures and final settlement pricing.
Error accountA broker's disclosed account for genuinely mistaken trades, governed by a documented error policy, cleared by liquidating the trade in the market — never by moving it to another client's code.
EWMA volatilityThe volatility estimation method SPAN margining uses for ETIRD, updating yesterday's volatility estimate with today's observed return, weighted by a fixed decay factor of 0.995.
Execution riskThe risk that a trade does not execute as planned — that prices move between the legs of a strategy, that one leg fails to fill, or that an order fills away from the desired price.
Fund AdministratorThe service provider that keeps a Category III AIF's books, accounts for accruals, computes NAV and handles regulatory and tax reporting — an unregulated function in India that can be outsourced or done in-house.
Funded stocksShares or equity ETF units bought using money borrowed under margin trading, held only by pledge in a dedicated demat account and margined more heavily than the collateral backing the same facility.
Future Equivalent Open InterestOpen interest measured as the net delta-adjusted position across futures and options on an underlying, instead of adding up notional contracts — the basis for SEBI's index derivatives position limits.
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.
GuardianThe adult who transacts on behalf of a minor investor, completes KYC in their own name, and signs the application and payment instruments, because a minor cannot contract.
HaircutThe percentage cut applied to the market value of collateral before it counts towards margin, so that a fall in its price does not leave the clearing corporation or broker under-covered.
High Frequency TradingA type of algorithmic trading that is latency sensitive, marked by a high daily portfolio turnover and a high order-to-trade ratio — many orders placed and cancelled for every one that actually trades.
Historical simulationA way of estimating Value at Risk with no assumption about the shape of returns: apply today's portfolio to several years of past returns, sort the results, and read off the required percentile.
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.
Immediate or CancelA time condition on an order: whatever can be matched the moment it reaches the market is executed, and any unmatched balance is cancelled immediately rather than waiting in the order book.
Internet Based TradingAn order-routing facility, approved exchange-by-exchange, letting a broker route client orders to the exchange trading system over the internet instead of only from an exchange-provided terminal.
Invoking a lienThe lender selling or redeeming the securities marked under its lien and taking the proceeds — the securities are never transferred into the lender's own name.
Key-man InsuranceInsurance a Category III AIF takes on a key executive, typically the investment manager, paying out on that person's death, incapacity, kidnap or disability — cost is usually 1-2% of AUM.
Key-Person RiskThe risk that the death, incapacity or unavailability of the investment manager seriously disrupts a Category III AIF — its investment decisions, redemptions, compliance and trade execution.
Kill switchA pre-trade facility that lets a trading member cancel every one of its outstanding orders with a single command — the emergency brake for a malfunctioning terminal or algorithm.
Lean period marginAn additional margin on agricultural commodity futures during the pre-harvest lean period, when uncertainty about crop size makes spot prices volatile; the periods and rates are set by exchange circular.
Legal or regulatory riskThe risk that a contract cannot be enforced — one of the five named risks of derivatives trading, described in this workbook simply as "enforceability of contracts."
Legal riskThe risk that an entity cannot enforce a contract against another party — because the contract is potentially illegal, or the other party lacked proper authority to enter into it.
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.
Liquidity-adjusted VaRRegular Value at Risk plus the cost of unwinding the positions — because ordinary VaR measures the price move but ignores what it costs to actually get out.
Liquidity Enhancement SchemeSEBI's market-making framework to make newly available commodity derivative contracts more liquid — dated July 2019 in one chapter of the workbook and 9 October 2018 in another.
Loss Given DefaultIn the XXI-B workbook, the expected money loss from a borrower's default, calculated as probability of default × exposure at default. Textbooks often use LGD differently.
Maker and checkerThe internal control an RTA follows so that no single employee both processes and approves a document — one person (the maker) enters a request, and a second (the checker) verifies it before it takes effect.
Margin Period of RiskThe time horizon, subject to a minimum of 2 days, that a clearing corporation must estimate for each equity derivatives product and use to scale up SPAN's 99% value-at-risk initial margin.
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.
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.
Market order with protectionA combination of a market order and a limit order that lets a market order execute only up to a price level specified by the trader, so it cannot be filled at any price.
Market Wide Position LimitThe ceiling on total open interest in a stock's futures and options across exchanges — 20% of non-promoter shares. Above 95% no fresh positions are allowed until it falls to 80%.
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.
median quarter-sigma order sizeA liquidity eligibility test for stock derivatives — the median order size, over six months, needed to move the stock price by a quarter of a standard deviation — which must be at least Rs 75 lakh.
MICR codeThe 9-digit Magnetic Ink Character Recognition code printed on the MICR band of a cheque, identifying the bank branch: 3 digits for the city, 3 for the bank and 3 for the branch.
Mode of operationHow a jointly held investment may be transacted — jointly, or on an either or survivor basis — chosen at application and recorded in the folio along with the order of holders.
Monte Carlo simulationA VaR method that generates the portfolio's returns at random from chosen statistical parameters, repeats this about 10,000 times, sorts the outcomes and reads off the required percentile.
M-SOCA Security Operations Centre built for the cyber security needs of smaller market intermediaries — cheaper and more accessible than building a full SOC, and mandatory for portfolio managers except the smallest.
NACHNational Automated Clearing House — NPCI's centralised electronic clearing system for repetitive payments, which replaced ECS and now carries SIP debits and dividend and redemption credits.
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.
Offsetting positionsNetting a Category III AIF's long and short positions in the same stock, index or commodity with the same maturity, so that its leverage is measured on net rather than gross exposure.
Operational riskThe risk of loss from fraud, inadequate documentation, improper execution or similar internal failures — one of the named risks of derivatives trading, distinct from market, credit, liquidity and legal risk.
Order bookThe live electronic list of unmatched buy and sell orders for a contract, arranged by price level, showing quantity and number of orders at each price — generally up to five price levels a side.
Order Management SystemThe trading software Category III AIFs use to route and monitor orders and get real-time data on fund-level and firm-level positions, client accounts and fees.
Parametric VaRValue at Risk estimated from just two parameters — expected return and standard deviation — assuming returns are normally distributed.
PINS accountThe designated bank account through which an NRI's or PIO's purchases and sales of listed Indian securities must be routed, and through which the bank reports those investments to the RBI.
Pool executionA PMS execution model: trading for all clients together and then allocating securities to each client's demat account — as opposed to trading in each client's own name.
PoP collection accountThe non-withdrawable bank account a Point of Presence must keep for each pension scheme, named in a prescribed format, from which funds can only be transferred to the NPS Trust.
Position limitsThe maximum open positions the whole market and each trading member or client may hold in interest rate derivatives — set as the higher of a percentage of open interest or a rupee amount, and always specified in lots.
Price bandThe highest and lowest price at which a contract may trade on a given day, set as a percentage of its base price to block erroneous and manipulative orders.
Price freezeWhat happens when an order is placed at a price beyond the exchange's operating range for that contract — the order reaches the exchange as a frozen order rather than executing.
Principal riskThe risk of having paid or delivered without receiving the other side — the settlement half of counterparty risk, eliminated by a central counterparty acting through novation.
Product Success FrameworkSEBI's exit-eligibility test for index and stock derivatives, based on trading-member participation, trading frequency and turnover, applied after a 6-month gestation period.
Quantity freezeThe maximum number of derivatives contracts or lots that can be traded in a single order, set by the exchange to prevent large unintended orders from distorting prices and to catch "fat finger" errors.
RepatriationTaking investment proceeds out of India in foreign currency — permitted without limit where the money came in as foreign currency, and capped at USD 1 million a financial year from an NRO account.
Replacement-cost riskThe pre-settlement half of counterparty risk — the cost of having to replace a defaulted trade, usually at a worse price than the original, before settlement was ever due.
Reverse stress testA clearing corporation's periodic exercise to find the market conditions under which its margins, Core SGF and other financial resources would prove insufficient to meet its obligations.
Risk frameworkThe risk structure a portfolio manager sets at the strategic level, in line with the investment objective — it names the risks, ranks them, decides how each will be treated, and is monitored and modified continuously.
Risk reduction modeThe restricted state a stock broker is put into when 90% of its collateral is used up by margins: pending orders are cancelled, only IOC and margin-checked orders pass, until utilisation falls below 85%.
Risk treatmentThe action a portfolio manager takes when a risk event occurs — tolerate it, mitigate it, transfer it, or terminate the activity — chosen on the nature, severity and frequency of the event.
Running accountA client's written, revocable authorisation letting the broker keep the client's funds instead of paying them out within one working day of pay-out, subject to settlement at least every 30 or 90 days.
Sauda bookThe broker's statutory register of every transaction effected, showing the security, its gross and net-of-brokerage value and the client's name, required to be preserved for eight years.
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.
Securities Trading using Wireless TechnologyTrading through internet-protocol devices such as mobile phones or laptops with a data card, available only to brokers already eligible for Internet Based Trading and governed by the same conditions.
Self-trade checkAn exchange pre-trade control that cancels an incoming order — the active or passive side — when it would match against another order from the same PAN or custodial-participant code.
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.
Significance levelThe probability, equal to 1 minus the confidence level, that a variable's true value falls outside the chosen confidence range — the basis for picking the z-score used in Value at Risk.
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.
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.
Spread margin benefitThe lower overall margin SEBI permits on a spread position versus margining each leg on its own — up to 75% for the same commodity, up to 50% across two related commodities.
Stop loss orderAn order that stays out of the market until the price reaches a trigger price, then enters as a limit or market order - used to cap the loss on an open position.
Stress testA scenario-based risk technique where a portfolio manager creates an extreme negative event, real or hypothetical, to estimate the potential loss it would cause to the portfolio.
Systemic riskThe risk that one participant's default triggers defaults by others until the settlement system itself fails — the domino risk, not the market risk.
Technical glitchA malfunction in a stock broker's electronic trading or risk systems during market hours that stops, slows or distorts functions like log-in or order placement for five minutes or more.
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.
TradeThe binding transaction created the moment a buy order and a sell order are matched on the exchange, after which it can be modified only in narrow, regulated ways and never simply cancelled.
Trade allocationThe back-office process of splitting a single institutional order — entered with the CP code "INST" — across the client's various sub-schemes or portfolios, based on deal sheets from the front office.
Trade annulmentA trading member's request, made within 30 minutes of trade execution, to cancel a trade already matched on the exchange — accepted only if it meets set conditions, and charged an annulment fee.
Trade enrichmentThe automatic back-office step of adding brokerage, GST, stamp duty and Securities Transaction Tax details to a trade immediately after execution, ahead of settlement and billing.
Trader WorkstationThe terminal through which a trading member logs in to the exchange's trading system to enter orders and view its own orders, trades and market information.
Trading limitThe exposure ceiling a clearing member sets, through the trading system, for each trading member it clears for — distinct from the market-wide position limit SEBI itself defines.
Unique Client CodeThe single code a broker assigns to a client once KYC is complete, mapped to that client's PAN and demat account, under which every one of the client's orders must be entered on the exchange.
UpstreamingThe SEBI framework requiring stock brokers and clearing members to transfer all client funds to the clearing corporation by end of day, as cash, a lien on a bank FD, or units of a Mutual Fund Overnight Scheme.
USCNBAThe bank account in which a stock broker or clearing member must receive all client funds, named "Name of the SB/CM – USCNB account" under SEBI's standardised bank account nomenclature.
Volatility Scan RangeThe percentage volatility movement SPAN applies when scanning a portfolio for its worst-case loss, floored by SEBI at levels that depend on the commodity type and its annualised volatility.
Weighted average priceTotal cost of a day's aggregated purchases (or sales) divided by total quantity — the price at which a portfolio manager must allocate aggregated trades to clients, pro rata.
Z-scoreThe number of standard deviations a value lies from the mean of a standard normal distribution — the cut-off figure used to compute Value at Risk at a chosen confidence level.