Sebi margin rule on option sellers more bite than bark

livemint.com:

Subscribe to enjoy similar stories. A perceived small change by the market regulator to strengthen the index derivatives framework may have a larger-than-anticipated impact on option trading volumes when it is applied on Thursday for the first time at the expiry of the weekly Nifty options contracts, market experts said.

This new measure increases by 2 percentage points the extreme loss margin (ELM) on the expiry day of index options on sellers, effectively increasing the margin to trade to 14% from 12% on index options expiry day. ELM is applied to cover risks beyond those envisaged by the standardized portfolio analysis of risk (SPAN) margin, which covers 99.9% of loss scenarios.

“The thinking initially was that the ELM increase would not have as significant an impact as compared to some of the other directives," said Ashish Nanda, president & head of digital business at Kotak Securities. “However, it so seems that those selling option contracts in index options on expiry day will see a reasonable rise in margins to trade." Thanks to this new measure, quite a few clients received alerts from brokers on Tuesday night and Wednesday that they had margin shortfalls in their trading accounts, which needed to be topped up by Thursday, to enable them to hold on to their trades.

Also read | Sebi curbs to help boost BSE's Sensex options, says CEO This 2% increase in ELM by the Securities and Exchange Board of India (Sebi) was initially thought to be relatively insignificant compared to other rules brought in to reduce index option volumes. But when applied at contract level, the impact was seen to be far greater, and the quantum of shortfall in margins surprised some clients.