Sebi may cut non-expiry day margins to boost longer-term derivatives trading

Subscribe to enjoy similar stories. The Securities and Exchange Board of India (Sebi) is likely to rationalise margins on equity derivatives on non-expiry days to encourage big traders to place longer-term bets rather than focus solely on the expiration day, two people aware of the development told Mint. This move could deepen the derivatives markets, where most of the trading by large, high-frequency and proprietary traders as well as individual investors takes place on weekly option contracts' expiry.

"The RMRC (Sebi’s risk management and review committee) is discussing a rationalisation of margins as the current ones can discourage long-term traders, especially on non expiry days," said one of the persons cited above. The second person said Sebi would seek feedback from market participants on these changes. Mint’s email to Sebi did not elicit a response.

Margin in this context is the initial deposit that clients must provide to the exchange to initiate and maintain leveraged positions in the futures, options, or cash segments. Indian exchanges require brokers to post both SPAN (standard portfolio analysis of risk) margin and extreme loss margin (ELM) to cover derivative positions, rather than just the SPAN margin, which is the standard practice globally. SPAN is a proprietary methodology of the Chicago Mercantile Exchange to assess the risk to a trader's portfolio from events that could increase volatility.

It is considered adequate to cover 99.975% of likely risk scenarios that could affect a trader's portfolio. However, in addition to SPAN, Indian bourses impose an ELM that is based on the derivative's notional or total value as an added guardrail. This ELM drastically increases the margin an investor has to put up