Markets

Unlike in foreign bourses, in India margin is exposure, and not risk based, rues ANMI report

PALAK SHAH Mumbai | Updated on June 24, 2019 Published on June 24, 2019

‘Margin requirement for futures and options in equity segment is highest’

Is margin requirement for stock trading in India the highest compared to global peers? A research report submitted by the Association of National Exchanges Members of India (ANMI) says India is the most margin-heavy market globally.

Margin is the portion of money collected by exchanges upfront before giving exposure to brokers for trading in the equity derivatives segment. Initial margin is the minimum margin that is required to be in a broker’s account to take a position. Brokers have to always keep margin money with the exchange, based on which they are given position limits to trade in the market.

Every other market imposes a single margin using SPAN (standardised portfolio analysis of risk) except India, which loads exposure margin and excessive short option margin over and above SPAN, ANMI has said.

The report gains significance as SEBI has constituted a committee to study the margin structure in Indian markets and a few recommendations are expected this year.

According to ANMI, SPAN is a powerful and flexible tool available to address risk; therefore, SPAN should be the maximum component of any margin calculation. SPAN margin is the minimum requisite margin blocked for futures and options (F&O) writing positions as per the exchange’s mandate. In addition to this, Exposure Margin is the margin blocked over and above the SPAN to cushion for any market-to-market (MTM) losses.

Exposure margin

The entire initial margin (SPAN + Exposure) is blocked by the exchanges upfront, causing much heartburn. SPAN collects risk-based margin, whereas exposure margin is levied on all exposure, even if such exposure results in reduction of risk. For instance, even hedging positions using call, put have exposure margins.

For exchanges trading in Gujarat’s GIFT City, which is promoted by India as an offshore destination, the margin requirements are lax even when they trade the same products as in the Mumbai market, brokers say.

India levies 5-7.5 per cent short option margin (SOM) versus under 1 per cent by other global markets. This results in hedge positions being margined excessively. All markets, except India, provide inter-commodity margin benefit to some degree.

For exposure-heavy but limited-risk strategies, margin in India is more than 100 times maximum risk, according to ANMI. “The net result of such high handedness is that margins in India co-relate far less (to) actual risk and far more (to) ... exposure as against other markets that impose margins on risk,” said a ANMI member.

On December 17, 2018, SEBI had issued a circular on revised risk management framework for equity derivatives. It made sweeping changes to the margin structure, raising the exposure margin.

Published on June 24, 2019
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