Hedgers to benefit as market regulator may lower margin for F&O trades

The Securities and Exchange Board of India had appointed a Risk Management Review Committee to look at the margin collection system in India

Market participants in the derivatives market may be in for a breather as the cost of hedging in the derivatives market may reduce if the recommendations of a risk review committee are accepted. 

The Securities and Exchange Board of India (Sebi) had appointed a Risk Management Review Committee to look at the margin collection system in India. The committee has recommended that overall margining for hedged positions will be linked to the risk involved rather than total exposure. This could result in lower costs for hedgers. 

“India used to have more of an exposure-heavy margining system rather than risk-based margining. This may become more risk-based in future,” said Rajesh Baheti, managing director, Crosseas Capital Services. “The margins collected should be proportional to the risks taken and not just for a number of outstanding contracts. If I buy a future and sell a call, for instance, my risk reduces though my exposure increases from one to two,” he said.

“Around the world, there is no concept of exposure margin. When you take positions that hedge each other the SPAN margin drops but the exposure margin remains the same. The regulator is trying to correct that,” said Nithin Kamath, founder and CEO, Zerodha.  

For instance, he says, if you short a 12000 call and buy a 12100 call your maximum risk is 100 points or about Rs 7,500 on the Nifty. Today you may have to shell out about Rs 80000 as margin on that, which does not make any sense. In the new structure the margin may drop by 70 per cent, he says.

SPAN margin is the minimum requisite margin blocked for futures and option writing positions as per the exchange’s mandate and exposure margin is the margin blocked over and above the SPAN to cushion for any mark to market losses.

At the time of initiating a futures trade, the client has to adhere to the initial margin requirement. The entire initial margin is blocked by the exchange.

In the F&O segment, it is now mandatory for members to collect initial margin, net buy premium, delivery margin, and exposure margin from clients upfront.