NSE hikes derivatives exposure margin again

The exposure margin on index products has been raised from 4.5 to 6 per cent.

Probably sensing that stocks are getting into riskier territory, the National Stock Exchange today announced another round of increase in the derivatives exposure margin.

Brokers said this would impact sentiment significantly. The rapid rise in margin levels could compel retail traders to cut derivatives positions as they may not be in a position to afford the new margin requirements immediately.

The margin is for brokers only and they will have to use their discretion on whether to pass them on to their clients.

The exposure margin on index products has been raised from the current 4.5 to 6 per cent. For stock products, the exposure margin will be 10 per cent, or 1.5 times the standard deviation of daily logarithmic returns of the stock price in the last six months.

Currently, the exposure margin on stock products is 7.5 per cent. Adding to this, the Span margin, which is determined on the "value at risk", the total margin for the Nifty works out to 12 per cent and 20-25 per cent on average for stock products. With the recent hike in the exposure margin, the total margin will rise further.

"There is feeling that the markets are over leveraged and that is why the Exchanges are raising margin levels. This would impact market sentiment," said Naresh Kothari, sales head, Edelweiss Securities.

Market sources said that currently, several brokers are heavily leveraged funding even their initial margins through line of credit with banks and other lending institutions.

"The high margins in equities is compelling smaller players to exit the derivatives segment. Plus since the markets are no longer showing definitive trends, it has become more difficult to make money in derivatives," said Vijay Bhambwani, CEO, BSPL India.

This is the second round of margin increase that has been effected within a month. The last announcement which was made on April 8, came into effect on April 17.

Brokers said that this would impact sentiment significantly and could force smaller retail players to cut out of the derivatives margin as they could face cash crunch. The change will come into effect from April 28, the NSE circular issued today said.

"In continuance of surveillance review and pursuant to the meeting with Sebi, with a view to ensure market safety and safeguard the interest of investors, the Clearing Corporation has decided to take the following action." The NSE circular said. The revised applicable exposure margin will be applicable in respect of 117 securities.