Rs 2 lakh needed to take a position on volatility

NSE still to formally decide but sources say 20% margin on VIX futures

The National Stock Exchange is likely to set a 20 per cent margin for trading volatility-based derivatives, translating into an upfront payment of Rs 2 lakh for a contract size of Rs 10 lakh. The margin has been all but finalised, on the basis of how volatile the underlying index is likely to be, say two sources familiar with the matter. “The regulator has set a minimum margin; we are planning to charge around 20 per cent as the final figure,” said a source. Another official confirmed this.

R Sundararaman, chief of new products at (NSE subsidiaries) India Index Services & Products and Dotex International, said they’d be deciding soon on the margin requirement. “I don’t know the number, we will be working it out... 14 per cent is the threshold, it should not be below that... The margins are based on the volatility profile of the product. The risk management system is a volatility-driven risk management system. The same thing will be applicable here. If VIX happens to be very volatile, it will have a higher margin. If it is less volatile, then at that point of time, it will have a lower margin. The margin is not fixed, the margin methodology is fixed,” he said.

MARGIN CALL

• VIX-based derivatives, which allow investors to take a call on market volatility, will trade from February 26
• NSE, Sebi discussions have resulted in minimum margin threshold of 14%
• Exchange likely to set it at 20%, say sources
• The floor contract value is likely to be Rs 10 lakh, translating to initial margin of Rs 2 lakh

The exchange had set parameters for margins through an earlier circular, including a nine per cent initial margin and a five per cent exposure margin.

The NSE has announced the launch of a derivative product based on India VIX, its volatility index, which would allow investors to take a view on how volatile the market is likely to be in the days ahead. It is set to begin trading from February 26. The volatility index gives a sense of how much of a swing traders expect in the market over the next 30 days. For example, a reading of 17 would mean traders believe the Nifty could move by as much as 17 per cent (on an annualised basis).

The contracts are to have a weekly tenure and will be settled on Tuesdays, according to earlier statements from the exchange.