Sebi’s margin framework review expected to lower hedging costs

The Securities and Exchange Board of India’s (Sebi’s) review of the 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 a few options strategies.

“Trading option strategies will now make business sense. The margins for hedged positions could drop by 70 per cent,” said Nithin Kamath, cofounder and CEO at Zerodha.

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

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

“The new framework is a great starting point. Hopefully, as our markets mature, the margin required for hedged positions will go even lower,” Kamath said.

In its circular, Sebi divided value at risk margin rates in three categories, based on liquidity. With respect to the margin framework for derivatives, Sebi 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 the 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 intraday price movement of the security observed in the underlying market in last one month,” Sebi said.

This would continue until the monthly expiry date of derivative contracts that falls after the completion of three months from the date of levy.

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