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Ahead of Budget 2018, market regulator Securities and Exchange Board of India (Sebi) and stock exchanges are taking precautions, anticipating a significant run-up in the equity market.
Sebi has asked brokers to collect higher margins from those with sizeable positions in futures and options. These include foreign institutions, wealthy investors and proprietary desks.
There are concerns that the huge build-up of positions in equity derivatives could pose a systemic risk. Stock exchanges have asked brokers to mop up extra deposits from clients with significant exposure to derivatives.
“In the joint meeting of exchanges and Sebi, it has been decided that markets should be alerted at different levels of MWPL utilisation so that investors can make an informed decision on whether to hold or square off their existing positions well before regulatory/surveillance actions set in,” said an NSE circular on January 23.
Brokers and traders have reportedly been asked to cough up 18-30 per cent additional margins immediately. The additional surveillance margins on a client’s open positions will be part of a stress-testing that takes into account the worst-case loss.
Brokers typically collect two margins. The first is an upfront margin, also called the SPAN margin, and the second the exposure margin. The SPAN margin is collected at the time of initiating trades, while the additional margin over and above this is the exposure margin. This is how the MWPL works.
At the end of each day, the aggregate open interest across all exchanges in the futures & options on individual scrips is disseminated along with the market-wide position limit for that scrip to test whether the aggregate open interest for any scrip exceeds 95 per cent of the market-wide position limit for that scrip. If yes, the exchange takes note of open positions of all clients/TMs as at the end of that day in that scrip, and from next day onwards the client/TMs should trade only to decrease their positions through offsetting positions till the normal trading in the script is resumed.
The normal trading in the scrip is resumed only after the aggregate open interest across exchanges comes down to 80 per cent or below of the market-wide position limit.
A facility is available on the trading system to display an alert once the open interest on the National Stock Exchange (NSE) in the futures & options contract in a security exceeds 60 per cent of the market-wide position limit specified for such security. Such alerts at present are displayed at intervals of 10 minutes.