INSUBCONTINENT EXCLUSIVE:
The Securities and Exchange Board of India (Sebi) is looking to revamp margins on derivatives trading to reduce costs for market
participants, said two people aware of the development
The regulator will consider a single margin system that will help those who trade in futures and options to hedge their share portfolios
Brokers 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.
Sebi and stock exchange officials discussed the matter in the last week of October, the people said
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.
The regulator didn’t respond to queries.
Derivative market traders currently pay two margins —
standard portfolio analysis of risk (SPAN) and exposure
The first 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
Exposure is an additional margin that brokers collect from their clients for trading in derivatives at the time of initiating a trade.
The
regulator and the exchanges are looking at scrapping the second and retaining only SPAN, the people said
An increase in SPAN margins will partially offset this, benefiting hedged bets.
“If the proposal is implemented, several traders using
hedging strategies will end up paying substantially lower margins since SPAN margin is calculated at a portfolio level,” said Chandan
Taparia, derivatives analyst, Motilal Oswal Securities
The exposure margin, on the other hand, pertains to that particular trade
“This is a welcome step since such hedging strategies carry limited risk and hence would not be subjected to high margins,” Taparia
said.
Brokers said 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,” said Nithin Kamath, founder and CEO of Zerodha
“With the new proposed margins, we would be enabling retail to trade options through strategies, which have limited risks.”
The
regulator had received several representations from industry bodies, including FPIs, to rationalise the margining system for the derivatives
In the run-up to settlement, margins on some stocks surge as much as 100 per cent of the contract value whereas the global standard is 10-20
per cent.
“The idea of Sebi was to simplify the margining structure and also give some benefit to genuine traders who use derivatives for
safety net purposes,” said one of the persons cited above
“However, Sebi is planning to tweak the existing calculation for SPAN margins by increasing the multiplier
This would mean SPAN margins could go higher in lieu of exposure margin.”
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
“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
“Our sense is that Sebi will continue to charge the additional margins on such counters.”
About 30-40 stocks are subject to additional
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
This impacted nine counters including Bajaj Consumer, Dish TV, Sadbhav Infrastructure and GMR Infrastructure.
