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Risk Management

The Securities and Exchange Board of India (SEBI) has implemented comprehensive risk management policies to mitigate market, operational, and systemic risks in capital markets. Effective risk management not only safeguards investor interests but also fosters market development.

Under SEBI's guidance, stock exchanges have established robust risk management systems to ensure the safety and efficiency of the market. These systems include:

Trading Rules and Regulations

Effective risk management in capital markets hinges on well-defined trading rules and regulations. These measures serve to:

  • Margin Systems: Enforce various margin requirements, including daily margins, mark-to-market margins, and volatility margins, to mitigate price volatility and curb excessive risk-taking by market participants.

  • Exposure Limits: Establish exposure limits for brokers to prevent them from exceeding their buying capacity and ensure financial stability within the market.

  • Capital Adequacy Norms: Impose capital adequacy norms on market members to bolster their financial resilience and ability to meet obligations.

  • Indemnity Insurance: Encourage the use of indemnity insurance to protect market participants against unexpected events and losses.

Circuit Breaker

Circuit breakers are an integral part of risk management in capital markets. They are designed to:

  • Control Volatility: Automatically halt trading when market prices deviate significantly from predefined price bands, helping prevent excessive price volatility.

  • Information Gathering: Allow participants a temporary break to gather information, assess market conditions, and reduce panic during turbulent times.

  • Price Bands: Set specific price bands that, if breached, trigger a temporary trading halt. These bands are adjusted periodically to suit market conditions and ensure safety.

  • Index-Wide Circuit Breakers: Implement index-based circuit breakers at various levels (e.g., 10%, 15%, and 20% index movements) to safeguard market stability.

  • Scripwise Price Bands: Prescribe individual price bands for securities, except those in the derivatives segment and new listings, to minimize abrupt price swings.

Effective risk management, including well-structured trading rules and circuit breakers, plays a crucial role in maintaining the integrity and stability of capital markets. These measures protect investors and ensure the orderly functioning of financial markets.

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