SEBI to consider lowering margins cost of derivatives by 30-35%

According to a press report by Pavan Burugula in the ET, the Securities and Exchange Board of India (Sebi) is looking to revamp margins on derivatives trading to reduce costs for market participants.

It is stated that SEBI will consider a single margin system that will help those who trade in futures and options to hedge their share portfolios.

Brokers have said they could end up paying 30-35 per cent less in initial margins and trading costs could drop 5-10 per cent for others, depending on the nature of their bets.

Market participants have been lobbying for such a move on the grounds that margins in India are among the highest in the world. This is said to be one of the factors behind foreign portfolio investors (FPIs) preferring to trade Indian derivatives in offshore locations such as Singapore instead of on-shore.

It may be noted that derivative market traders currently pay two margins. One is the standard portfolio analysis of risk (SPAN). The other is the exposure.

SPAN is an upfront margin that traders pay at the time of placing trades, a percentage of the value of the trades as calculated by the SPAN software.

Exposure is an additional margin that brokers collect from their clients for trading in derivatives at the time of initiating a trade.

It is believed that SEBI and the stock exchanges are looking at scrapping the second and retaining only SPAN.

An increase in SPAN margins will partially offset this, benefiting hedged bets.


Chandan Taparia, derivatives analyst, Motilal Oswal Securities stated that SEBI's proposal will benefit traders using hedging strategies . They will pay substantially lower margins since SPAN margin is calculated at the portfolio level.

He called it a welcome step since hedging strategies carry limited risk and hence would not be subjected to high margins.

Brokers also said that a single margin structure will help individual traders bet on options trading strategies at lower cost.

“On Indian exchanges, retail traders don’t trade option strategies as the margin requirements make them non-viable even though the maximum risk is limited,” Nithin Kamath, the founder and CEO of Zerodha said.

“With the new proposed margins, we would be enabling retail to trade options through strategies, which have limited risks,” he added

ET also said that SEBI has received several representations from industry bodies, including FPIs, to rationalise the margining system for the derivatives market.

A single margin structure will help market participants allocate capital more efficiently.

“Until now, introducing a single margin wasn’t possible since BSE and NSE do it at the exchange level. However, with the introduction of interoperability before the clearing corporations, such a step has been made possible,” said a senior exchange official.

“We have also represented to Sebi not to increase the SPAN margins substantially higher since an internal study done by us showed current SPAN margin calculation covers losses that could occur in 99 per cent of scenarios.”

However, those punting on highly volatile stocks are unlikely to get any relief from the scrapping of exposure margins, said the head of derivatives at a domestic brokerage.

“Such contracts are currently subject to more margins, including additional surveillance margins (ASM) and bonus margin for highly leveraged stocks,” the person said. “Our sense is that Sebi will continue to charge the additional margins on such counters.”

About 30-40 stocks are subject to additional margins. In October, Sebi proposed to impose 35 per cent higher margins on the contracts of companies where more than 25 per cent of the promoter shareholding is pledged. This impacted nine stocks including Bajaj Consumer, Dish TV, Sadbhav Infrastructure and GMR Infrastructure.

See also:
SEBI Circular Reg Cross-Margining facility in respect of offsetting positions and
Sebi’s cross-margining circular will lead to big margin benefits on derivative trade