Types of Margins and the Process of Monitoring the Margin Asset Utilization Ratio from June 01, 2022
What is Margin?
Margin is when the obligated party deposits a sum of money or precious metals, gemstones, or valuable papers into a blocked account at a credit institution to ensure the fulfillment of their obligations.
The margin posting by clearing members at VSD is exactly what it sounds like: members deposit a sum of money, precious metals, gemstones, or valuable papers into a blocked account at VSD to ensure the fulfillment of their obligations.
Regulations on types of margin and monitoring the margin asset usage ratio from June 1, 2022
Types of Margin from June 1, 2022?
Based on Article 5 of the Clearing and Settlement Regulations for Derivatives Transactions at the Vietnam Securities Depository Center, promulgated together with Decision 61/QD-VSD 2022, the following types of margin are regulated:
Initial Margin (IM)
- Initial margin is the minimum margin value that clearing members must deposit with VSD for the projected opening positions under their name before the transaction execution, excluding offsetting transactions of the same trading account. Based on the method guided by VSD, clearing members calculate the initial margin value for the projected positions to be deposited according to the initial margin ratio published by VSD as per point (e) of this clause. The method of determining the initial margin ratio and initial margin value is guided in Appendix 2 issued together with these regulations.
Delivery Margin (DM)
- Delivery margin is the margin value that the selling clearing member and the buying clearing member must maintain from the day after the last trading day (E+1) until the final settlement date (E+3) to ensure the fulfillment of contract obligations, replacing the initial margin as regulated in clause 1 of this Article.
Variation Margin (VM)
- Variation margin is determined based on the profit and loss position in the trading session of the open positions on the investor’s trading account as follows:
+ For existing positions on the account: It is the difference between the updated trading price in the trading session (excluding the price of agreed transactions) and the closing settlement price of the previous trading day (for positions on the account from the close of the previous trading day) or the opening settlement price (for positions newly opened on the day).
+ For intraday closed positions: It is the difference between the closing settlement price and the closing settlement price of the previous trading day (for positions on the account from the close of the previous trading day) or the opening settlement price (for positions newly opened on the day).
Margin Requirement (MR)
Margin requirement is the total margin value that the clearing member is obligated to deposit to maintain positions under the name of the clearing member, calculated in the trading session per the position portfolio on each investor’s trading account and the clearing member’s account, including the following margin component values:
- Initial margin.
- Delivery margin as determined in point (a), clause 2.2 of this Article (applies only to undelivered convertible bonds for settlement obligation).
- Variation margin.
Based on the above types of margin, your company could choose the appropriate type for itself.
Process of Monitoring the Margin Asset Usage Ratio?
Based on Article 13 of the Clearing and Settlement Regulations for Derivatives Transactions at the Vietnam Securities Depository Center, promulgated together with Decision 61/QD-VSD 2022, the process of monitoring the margin asset usage ratio is regulated as follows:
- VSD establishes three (3) warning thresholds to monitor the margin asset usage ratio on each investor’s account during the trading session as follows:
+ Level 1 warning: when the margin asset usage ratio reaches 80%;
+ Level 2 warning: when the margin asset usage ratio reaches 90%;
+ Level 3 warning: when the margin asset usage ratio reaches 100%;
- If the margin asset usage ratio falls into levels 1 or 2 warning thresholds, VSD will send a warning notice to the clearing member to warn them to control the investor’s margin ratio accordingly.
- If the margin asset usage ratio falls into level 3 warning threshold, VSD will apply the following treatment measures:
+ Send a notice to HNX requesting temporary suspension of transactions for the violating account;
+ Send a notice to the clearing member requesting not to execute new position opening transactions on the violating account, except for offsetting transactions to close positions and/or supplement margin assets to reduce the margin asset usage ratio. If the clearing member executes an offsetting transaction to reduce the margin asset usage ratio, the clearing member must notify in writing using Form 03/PS-TTBT issued together with these regulations to VSD of the detailed planned offsetting transaction order for VSD to request HNX to restore the trading status for the violating account. The clearing member is entirely responsible for properly executing the notified offsetting transactions with VSD and may send a written notification to VSD via fax or email before sending the original document. The maximum period for the clearing member to apply the above treatment measures is 3 working days.
If after the above period the clearing member does not remedy the violation, VSD will request another clearing member to close the positions for the violating account. VSD will notify the substitutive clearing member of the details of the positions under the violating clearing member’s name that need to be closed and liquidated to place offsetting orders. After successful transactions, the offsetting positions will be transferred to the violating clearing member for clearing. VSD's request for a substitute clearing member to close and liquidate positions for the violating clearing member is based on the agreement between VSD and the substitutive clearing member.
- After the margin asset usage ratio falls below the level 3 warning threshold, VSD will send a notice to the clearing member and request HNX to immediately restore transactions for the violating account.
- The process of information exchange between VSD and HNX, the clearing member regarding warning, temporary suspension, and restoration of trading status for accounts violating the margin usage ratio is implemented according to Appendix 6 issued together with these regulations.
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