InvestorQ : What exactly are VAR margins and how are the calculated?
Abhisha Yadav made post

What exactly are VAR margins and how are the calculated?

3 years ago
Value at Risk margin (VAR) is also called the worst case risk in a single day. This is a statistical measure and is based on the concept of value at risk. Hence the name!
For the purpose of calculation of VAR margins all securities are classified into three groups:
For the securities listed in Group I, scrip wise daily volatility calculated using the exponentially weighted moving average methodology is applied to daily returns in the same manner as in the derivatives market. The scrip wise daily VAR would be 3.5 times the volatility so calculated subject to a minimum of 7.5%.
For the securities listed in Group II, the VAR margin is higher of scrip VAR (3.5 sigmas) or three times the index VAR, and it is scaled up by root 3.
For the balance of the securities listed in Group III, the VAR margin is equal to five times the index VAR and scaled up by root 3. The index VAR, for the purpose, would be the higher of the daily Index VAR based on NSE Nifty 50 or BSE Sensex. The index VAR would be subject to a minimum of 5%. In addition, NSCCL may stipulate security-specific margins for the securities from time to time.
The VAR margin rate computed as mentioned above will be charged on the net outstanding position (buy value-sell value) of the respective clients on the respective securities across all open settlements. There would be no netting off of positions across different settlements. The VAR margin shall be collected on an upfront basis by adjusting against the total liquid assets of the member at the time of the trade. The VAR margin so collected shall be released on completion of pay-in of the settlement. The VAR numbers are recomputed six times during the day taking into account price and volatilities at various time intervals and are provided on the website of the Exchange.
Remember, the VAR margins have to be mandatorily collected by the broker from the clients and failure to collect these VAR margins will be a breach of SEBI regulations and could invite penalty.