Trading limit
The 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.
In plain language
A clearing member does not let every trading member it clears for trade without limit. It sets its own internal ceiling for each one, on the trading system itself.
That ceiling is the trading limit. It sits below the market-wide position limit that SEBI defines for the market as a whole — the trading limit is the clearing member's own, tighter control over each trading member it is responsible for.
How it works
Chapter 8, section 8.3, distinguishes two related but different controls:
- Position limits are the maximum exposure any investor, Clearing Member, or the market as a whole may assume, and these are defined by SEBI.
- Trading limits, by contrast, apply per Trading Member and are decided by the Clearing Member on the computerised trading system — each Clearing Member may have several Trading Members under it, and sets a trading limit for each one individually.
Once a Trading Member reaches its position limit, it cannot enter fresh transactions that increase exposure; it may only enter transactions that reduce exposure. New positions are blocked; squaring-off of existing positions remains permitted.
A worked example
Clearing Member A clears for three Trading Members. On its trading system, it sets a trading limit of Rs 50 crore exposure for Trading Member X, Rs 30 crore for Trading Member Y, and Rs 20 crore for Trading Member Z — reflecting its own assessment of each one's risk, quite separately from any SEBI-defined position limit for the market.
If Trading Member X separately reaches the market-wide position limit SEBI has set for a particular stock, X cannot take any fresh position that increases its exposure to that stock — regardless of whether it still has headroom left under its Rs 50 crore trading limit with Clearing Member A. X can still square off existing positions in that stock.
Why NISM asks about it
Chapter 8, section 8.3, sets out position limits (SEBI-defined, market-wide) immediately alongside trading limits (Clearing-Member-defined, per Trading Member), and states the consequence of reaching a position limit — no fresh exposure-increasing trades, only square-offs. Expect a question distinguishing who sets a position limit from who sets a trading limit.
Common exam traps
- Position limits are set by SEBI; trading limits are set by the Clearing Member — these are not the same control, and a question may swap them.
- A Clearing Member sets a separate trading limit for each Trading Member it clears for, not one blanket figure for all of them.
- Reaching a position limit blocks only exposure-increasing trades — squaring off existing positions always remains available.
Check yourself
1.A trading member has reached his position limit. What is he permitted to do?
- a)Nothing — all his trading is suspended until the limit is reset
- b)Only transactions that reduce his exposure; new positions are not permitted, but squaring-off of existing positions is
- c)Any transaction, provided he deposits additional margin
- d)Only buy transactions, since selling would increase his risk
Show the answer
Answer: (b) Only transactions that reduce his exposure; new positions are not permitted, but squaring-off of existing positions is
The workbook states it precisely: once a Trading Member reaches his position limit, he will not be able to enter any fresh transactions which have the impact of increasing his exposure. He will be able to enter only those transactions which result in the reduction of his exposure. In short — new positions will not be permitted, but only squaring-off of existing positions will be permitted.
Option A is the instinctive answer and it is dangerous in practice as well as wrong in the exam. A member who cannot trade at all cannot close out, so his exposure can only grow with the market. The rule is designed to let risk shrink.
Option C invents a margin override. Position limits are defined by SEBI as maximum exposure levels; they are not purchasable with extra collateral.
Option D applies the wrong test. The question is never "buy or sell" — it is does this transaction increase or reduce exposure. Buying to close an existing short reduces exposure and is permitted; buying to open a new long increases it and is not.
Remember the two-tier structure as well: SEBI defines the position limits, while each clearing member decides the trading limits for the trading members clearing through him on the computerized trading system.
Where this is taught
Free preparation for NISM Series VIIIRelated terms
- 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%.
- Trading cum clearing memberA clearing member who is also a trading member of the exchange, and may clear and settle its own trades, its clients' trades, and the trades of other trading members and custodial participants.
- 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.