Market regulator Securities EBI is likely to review the margin or risk management system currently obtaining in the equity derivative market, and may even go for a complete overhaul.

The regulator recently tightened the margin requirement for brokers anticipating higher volatility during Budget and the upcoming general elections. But brokers body, the Association of National Exchanges Members of India (ANMI), told SEBI that the tighter margin requirements were excessive and may lead to a virtual shutdown of various segments of trading activity.

Following this, SEBI is likely to take a holistic approach and may even appoint a consultant to look into the margin system, a regulatory official told BusinessLine .

There is a view within SEBI that anyway, in nine months, the current cash settled derivative system in equity will be replaced by delivery-based settlement, whose margin norms, too, require a re-look.

As of now, the margin system in derivatives operates under the purview of SEBI’s market regulations and surveillance departments, which are often known to hold different estimations on risk management.

SPAN (standardised portfolio analysis of risk) and exposure margin are the two major components of margin on exchanges. SEBI has also hiked the minimum lot size of derivatives, which is between ₹5 lakh and ₹8 lakh. In addition, further market-to-market assessment is done on a daily basis.

Revised framework

On December 17, 2018, SEBI issued a circular on revised risk management framework for equity derivatives, which made sweeping changes to the margin structure in equity derivatives. The circular increased the ‘exposure margin’ for brokers, which has not gone down well as it may effectively make trading unviable for certain classes. Exposure earlier was 3 per cent of the contract value for index options and index futures and 5 per cent for stock futures and stock options. This has been nearly doubled.

SEBI’s new circular, coupled with the current lot size and other norms, leads risk management to ‘Sigma Six’ levels, which is extremely tough to achieve, say brokers. ANMI, in its letter to SEBI, said many components of margin levied/proposed to be increased are unwarranted, excessive, bear zero- to very-low correlation to risk and, therefore, will result in unprecedented damage to the functioning and growth of the equity derivatives market. Upfront margin levied for brokers to exposure limits far increases the cost of funds, it was felt.

Powerful tool

In ANMI’s view, SPAN is a powerful and flexible tool available to address risk. Therefore, it should be the maximum component of any margin calculation.

SPAN margin is the minimum requisite margin blocked for futures and option writing positions as per the exchange’s mandate. In addition to this, ‘exposure margin’ is the margin blocked over and above SPAN to cushion any MTM (market-to-market) losses.

The entire initial margin (SPAN + Exposure) is blocked by the exchanges upfront. ANMI, too, is likely to appoint a global expert to study the matter before submitting its analysis to SEBI, the sources said.

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