Sebi's review of margin framework expected to lower hedging costs

Strategies using opposing option contracts to see lower margin

The Securities and Exchange Board of India (Sebi) review of margin framework is expected to bring down margin requirements for traders in the futures and options (F&O) segment, with some brokerages estimating a dip of 60-70 per cent for some options strategies.

“Trading option strategies will now make business sense. Margins for hedged positions could drop by 70 per cent,” said Nithin Kamath, co-founder and chief executive officer at Zerodha.

The new margin requirements by Sebi were issued on Monday, after consultation with Sebi’s Risk Management Review Committee.

According to industry experts, the new norms imply that margin required is likely to remain the same for naked F&O positions. However, positions where the risk is limited due to investments in option contracts that hedge each other, the margin requirements is likely to be lower.

“This new framework is a great starting point and hopefully as our markets mature the margin required for hedged positions go even lower from here,” Kamath added.

In its circular, Sebi divided value at risk margin rates in three categories based on liquidity.

With respect of margin framework for derivatives, the regulator reviewed its guidelines on volatility calculation, scan range on price and volatility, calendar spread charge, minimum charge on short option, extreme loss margin and margin on consolidated crystallised obligation. Another provision was for additional margin for highly-volatile stocks.

“For securities with intra-day price movement of more than 10 per cent in the underlying market for three or more days in past one month, the minimum total margins shall be equal to the maximum intra-day price movement of the security observed in the underlying market in last one month," Sebi said.

This would be continued till monthly expiry date of derivative contracts that falls after completion of three months from date of levy, it added.

For securities with intra-day price movement of over 10 per cent in the underlying market for 10 or more days in past six months, the minimum total margins would be equal to the maximum intra-day price movement of the security in previous six months, the regulator said.

Last year, Sebi had introduced cross-margining facility, which is expected to benefit traders in the futures segment. The facility was meant for offsetting positions in co-related equity indices.

It would allow market participants to reduce total margin payment required, if they’d take two mutually offsetting positions. This allowed market participants to transfer excess margin from one account to another.