Collateral Concentration and a Margin Call
A clearing member, Fortress Clearing, has a margin requirement of PKR 270 million at 11:00. It has deposited PKR 190 million cash and shares of a single PSX-listed company with market value PKR 400 million. NCCPL applies a 35% haircut to that scrip and a 20% concentration limit: no more than 20% of the member's total eligible collateral may be in one scrip. The member's positions are concentrated in the same company. At 14:00 a price fall increases the margin requirement to PKR 360 million. The member offers another PKR 100 million of the same scrip as additional collateral and asks for a two-hour extension to arrange a bank guarantee. The bank guarantee desk closes at 16:00; NCCPL's margin cut-off is 15:00. The member has no other free collateral.
1. Calculate the eligible collateral value and the shortfall at 14:00. Show your reasoning.
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Step 1: Haircut the scrip: PKR 400m × (1 − 0.35) = PKR 260m. Step 2: Total before concentration cap = cash PKR 190m + PKR 260m = PKR 450m. Step 3: 20% cap = PKR 90m; the scrip can count for only PKR 90m. Step 4: Eligible collateral = PKR 190m + PKR 90m = PKR 280m. At 14:00 the requirement is PKR 360m, so the shortfall is PKR 80m. The additional PKR 100m of same scrip has a haircut value of PKR 65m, but the concentration cap rises only to 20% × (190 + 260 + 65) = PKR 103m; eligible collateral becomes PKR 293m, still PKR 67m short. It adds only PKR 13m of eligible value, not PKR 65m.
2. Should NCCPL accept the additional same scrip or grant the extension? What are the risk implications?
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Do not accept the same scrip as a cure. It is wrong-way collateral: the member's exposure and the collateral are driven by the same price. The concentration limit is already binding, so the extra scrip adds little. Granting an extension to 16:00 beyond the 15:00 cut-off leaves NCCPL exposed to further price falls with no cover. If a short extension is considered, make it conditional: no new positions, freeze client withdrawals, require cash or a bank guarantee by a hard deadline, impose an intraday penalty, and monitor continuously. If the deadline passes, apply default procedures and reduce positions. Do not waive the haircut or concentration limit informally.
3. What is the purpose of the haircut and concentration limit, and why not simply accept market value?
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Haircuts cover volatility and liquidation costs: if the member defaults, NCCPL must sell the shares, possibly at a discount and into a falling market. A 35% haircut is not a statement that the shares are worth 65%; it is a buffer. The concentration limit addresses correlation and liquidity: if the member is already exposed to the same company, accepting more of that scrip means collateral loses value exactly when the member is most likely to fail. Market value alone ignores fire-sale impact and wrong-way risk; accepting it would understate the true risk.