SEBI sets up panel for reviewing Margins on Derivatives

June 22, 2019

The Securities and Exchange Board of India (SEBI), the capital markets regulator has set up a panel, to review current framework of margins in the futures and options (F&O) derivative segment.

Key Highlights

The working group set up by SEBI is headed by the National Stock Exchange (NSE) Clearing Ltd., and will submit its recommendations to Secondary Market Advisory Committee.

Reason: This is review panel is set up based on the feedback that existing margin requirements in derivatives segment is pushing up cost of trading while not managing risk in most efficient manner,.

Need: The reviewing of Margin Derivatives assumes significance as lower cost of trading was the main reason why institutional investors preferred to trade in Nifty contracts on Singapore Exchange Limited (SGX) at Singapore rather than on highly liquid derivatives segment of NSE.

Findings of Study

High Margin requirements in India: In a recent study jointly conducted by Association of National Exchanges Members of India (ANMI) and consultancy firm Ernst & Young (EY), highlighted fact that trading in derivatives in Indian market costs much more when compared to most of other leading markets. This is due to a variety of margins that are imposed on traders.

Variety of Margins: It also disclosed that unlike other trading markets where higher event-based margins are applied temporarily (such as during instances of increased volatility), the Indian stock market levy a variety of margins during normal course which pushes up overall cost of trading.

Exposure Margin: Across global exchanges considered under review, only SPAN margin (or single margin system) is collected as initial margin but India levies exposure margin (or the margin charged over and above SPAN margin which is discretion of broker), excessive short option margin as part of initial SPAN margin and event-based margins for covering intermittent periods of higher volatility.

Way Ahead: Using margining as a tool should be to address risk of a given portfolio but should not be used to control market volumes/exposures.

« Previous Post Next Post »