SEBI tightens margin requirements for equity derivatives

SEBI has increased the margin requirements for brokers in the derivatives markets. The affected margin requirements include Standardised Portfolio Analysis Of Risk (SPAN) and exposure.

SPAN is the minimum deposit to be made by a broker to participate in future and options trading.

“Exposure” is the amount required over and above the SPAN to cover up mark-to-market (MTM) losses. MTM refers to the valuation of a contract on a daily basis to reflect the price changes of the underlying asset.

As futures and options (F&O) involve high risk, these tools are used for risk management in derivatives trading. Besides, the relevant exchange blocks the entire initial margin (SPAN plus exposure) upfront.

Currently, the SEBI’s market regulations and surveillance departments look after the margin system in equity derivatives. Both of these have the rapport of holding different estimates on risk management.

Earlier, the amount of exposure stood at 3% of the value of the contract for index F&O. For stock F&O, the requirement was 5% of contract value. Post-ruling, these requirements have almost been doubled.

In addition to this, the regulator has also increased the minimum lot size of derivatives. It falls between ₹5 lakh and ₹8 lakh. The regulator regards it as a precautionary move to tackle the high volatility during the Budget and upcoming general elections.

The Association of National Exchanges Members of India (ANMI) holds a different view altogether. It feels that the revised margin requirements are too high. Many components of the margins are unrelated to the risk.

These revisions would increase the cost of investment for the brokers. It may damage the smooth functioning and growth of the derivative market.

Following this, SEBI is planning to appoint a consultant to get a holistic view of the matter.