SEBI Weighs Derivatives Margin Reset To Promote Hedging, Curb Expiry-Day Speculation

The Securities and Exchange Board of India (SEBI) is examining a broad revamp of the margin framework for equity derivatives, with proposals aimed at making risk-defined trades more capital-efficient and encouraging the use of longer-tenure index contracts for hedging, Moneycontrol reported.

The discussions are at an early stage and the proposals may undergo further changes. One proposal under consideration is to extend the threshold for the regular margin framework for index derivatives from a residual maturity of up to nine months to 13 months. This would ensure that even those contracts having one-year maturity would continue to be kept within the existing system and not be regarded as long-term contracts with margin requirements.

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The proposed modification is expected to provide longer-term hedge facilities while also ensuring that there is no speculation to the extent that it has been done in the previous sessions.

SPAM Model Needs More Risk Scenarios

The SEBI is also considering providing flexibility for clearing organizations to use more number of scenarios in their risk assessment through the SPAM model. The existing model is using 16 price and volatility scenarios for assessing the portfolio losses. This number may be increased depending on the operational feasibility, which can either be calculated intraday or after the closing of the trading session.

A more detailed risk assessment could allow the Extreme Loss Margin (ELM) for certain risk-defined portfolios to be recalibrated. The regulator is examining a framework under which ELM could be linked to one-tenth of the Price Scan Range, subject to prescribed limits. For some portfolios, this could lower ELM to 1% from the existing 2%.

Based on the current analysis, it can be seen that the margins for some hedged index option strategy and for calendar spreads might be reduced by almost 50% and 30% respectively. The margins for outright direction strategy, comprising long futures and naked short options, may not change much.

Higher Margin Required On Expiry Dates

For dealing with speculative activities concentrated on expiry dates, SEBI will continue to require higher ELM on those dates. For the remaining trading days, however, the ELM might turn into a more dynamic mechanism by being made dependent on the Price Scan Range.

Furthermore, the SEBI is also considering a gradated Calendar Spread Charge for index derivatives. This would involve a spread charge of 1.25% for spreads with a maturity difference of less than three months, while larger spreads would be subject to increasingly higher spread charges of up to 3.5%.

Additional safeguards are also being considered for large conversion and reversal strategies exceeding ₹500 crore in index derivatives and ₹100 crore in stock derivatives. Such positions could attract an additional 3% ELM.

The proposals also include tighter margin checks under Risk Reduction Mode and a standardised methodology for calculating ELM. SEBI had not responded to a request for comment at the time of publication.

The review, if finalised, would seek to recalibrate margin requirements according to the risk profile of derivative positions rather than apply uniform treatment across strategies.