Source: Mint
Context:
The Securities and Exchange Board of India (SEBI) is considering a reduction in margins for equity derivatives trading on non-expiry days to encourage longer-term positions and reduce excessive concentration of trading activity on weekly options expiry days.
What Are Margins in F&O Trading?
- Margin: Upfront amount an investor must deposit to initiate a derivatives trade.
- In India, exchanges require:
- SPAN (Standard Portfolio Analysis of Risk) margin
- Extreme Loss Margin (ELM) — additional margin based on notional contract value
- SPAN covers ~99.975% of risk scenarios, while ELM acts as a risk guardrail.
Why SEBI Is Considering This Move
- Derivatives trading in India is heavily skewed towards expiry days
- High margins on non-expiry days:
- Discourage positional and hedged trades
- Encourage short-term, high-frequency expiry-day strategies
- SEBI aims to:
- Deepen the derivatives market
- Promote risk-mitigated, longer-tenure positions
- Improve market quality and stability
Current Margin Structure in India
Components of Margin
- SPAN Margin
- Risk-based margining system developed by CME
- Covers 99.975% of risk scenarios
- Extreme Loss Margin (ELM)
- Additional margin imposed by Indian clearing corporations
- Based on notional contract value
- Acts as a guardrail against extreme volatility
Key Difference from Global Practice
- Globally: Mostly SPAN-only
- India: SPAN + ELM, making margins significantly higher
Proposed Changes Under Discussion
For Non-Expiry Days
- Hedged portfolios
- ELM may be reduced from 2% → 0.5–1%
- Unhedged portfolios
- ELM likely to remain at 2%
- Objective:
- Reward risk-reduced (hedged) positions
- Encourage non-expiry day participation
For Expiry Days
- Margin structure to remain stringent:
- SPAN + 4% ELM
- Rationale:
- Higher volatility and settlement risk on expiry days
