Pushed to the corner due to rising cost of trading, stock brokers may seek changes to the regime of margin system in equity derivative segment. Brokers’ association Association of National Exchanges Members of India (ANMI) is expected to meet SEBI’s Market Advisory Committee (SMAC) on Monday, where it is likely to seek shifting of margin system in equity derivatives from “exposure based” to “risk based.”
Margin is a portion of money collected by exchanges upfront before giving exposure to brokers for trading in equity derivative segment. Initial margin is the minimum margin that is required to be in the broker’s account to take a position. Brokers are to keep margin money always with the exchange, based on which they are given position limits to play in the market.
On December 17, 2018, SEBI issued a circular on revised risk management framework for equity derivatives segment. The changes proposed by the circular, likely to be implemented from January 21, make sweeping changes to the margin structure of the equity derivatives segment. It further proposes to increase exposure margin.
ANMI says the 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. The association believes that the sole purpose for levy of margins should be risk mitigation and, therefore, margins that do not have a significant positive correlation to risk should not exist at all. ANMI has proposed that SEBI consult professor Jayant Verma, IIM Ahmedabad, an expert on derivatives before implementing the new margin regime.
In the view of ANMI, SPAN (standardised portfolio analysis of risk) 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 option 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 MTM (market-to-market) losses. The entire initial margin (SPAN + Exposure) is blocked by the exchanges upfront.