India's Derivatives Margin Rules Deter Global Investors Despite Record Trading Volumes

Foreign investors and market experts say India's derivatives margin framework remains out of step with major global markets, raising trading costs and reducing the attractiveness of the country's equity derivatives segment despite its position as the world's largest market by futures and options contracts.

The concerns come as foreign portfolio investors have withdrawn about $51 billion from Indian markets, shifting allocations to China and semiconductor-focused markets elsewhere in Asia. A weaker rupee and higher US bond yields have added to the outflows.

At the centre of the debate is India's margining framework, particularly the exposure margin charged in addition to the Standard Portfolio Analysis of Risk, or SPAN, margin. Investors argue that the additional layer often results in margin requirements that far exceed the actual risk of a trade.

Several investors, academics and former regulators interviewed for this story said India's framework requires recalibration to better align margin requirements with underlying risks while preserving safeguards against excessive speculation.

Defined-Risk Trades

The issue is most visible in options strategies where the maximum loss is known in advance.

"Core purpose of margin is to cover for the losses a trade can incur. Margin charged in India is 10x of the maximum loss," said Mayank Bansal, a Dubai-based hedge fund executive who recently discussed the issue at the National Stock Exchange.

Bansal cited a standard Nifty bull call spread involving the purchase of a 24,000 call option and the sale of a 24,100 call option when the index trades near 24,000. The maximum possible loss on such a trade is limited to the net premium paid, which he estimated at about Rs 35.

"Yet the total margin by Indian exchanges for such a position, inclusive of SPAN and exposure margin, can run to Rs 480-515. This is 15x maximum loss exposure," he said.

By comparison, the largest options exchange in the United States, the Chicago Board Options Exchange, requires only the net debit paid for an equivalent defined-risk position, according to market participants.

The debate comes despite India's dominance in global options trading. The National Stock Exchange processed more than 36.8 billion equity index options contracts during the second quarter of 2024 before the Nifty reached its peak. Total contracts traded stood at 124 billion in 2024 before easing to 105 billion in 2025.

Scope For Realignment

Academics and former regulators agree that some aspects of the framework warrant review, although they caution against directly replicating overseas models.

"The market microstructure is not the same, hence we may not directly copy frameworks in bigger markets," said Sankarshan Basu, professor of finance and accounting at the Indian Institute of Management Bangalore. "Some realignment is required; however, it has to be carefully calibrated."

Two other academics expressed similar views.

A former whole-time member of the Securities and Exchange Board of India said SPAN margins in India's equity derivatives market could be lowered in certain cases. Another former regulator said longer-dated contracts may justify lower SPAN requirements because risks are spread over time and hedged positions tend to be structurally stronger. He added that the same argument may not apply to shorter-term contracts.

Aniruddha Barman, who heads a mid-frequency trading firm in Hong Kong, also questioned the current structure.

"The SPAN risk itself is high compared to US, but the exposure margin can be removed. It is a very big challenge when you trade strategies like index arbitrage, options arb etc," he said.

Questions Over SPAN Methodology

Market participants argue that India's SPAN methodology embeds larger risk buffers than those used in several developed markets.

According to investors, margin floors remain above 9.3% of notional value even during periods of low volatility. By contrast, the Chicago Board Options Exchange's earlier methodology applied market move assumptions of minus 8% and plus 6% for broad index options.

The US market has since moved to SPAN 2, a more risk-sensitive framework. India has yet to adopt a similar system.

Some investors also point to differences in volatility calculations. Several global derivatives platforms shifted from a lambda value of 0.94 to 0.997 in Exponentially Weighted Moving Average models, placing greater emphasis on long-term volatility trends rather than short-term market shocks.

Many foreign investors use the higher lambda value in their internal risk models.

"In global derivatives markets, span is usually calculated at 3-3.5 sigma. India is building excessive buffers at 6-sigma. Even the SPAN floor of 9.3% is higher," said a market expert.

Margin Period Debate

Another area of contention is the Margin Period of Risk, or MPOR, which represents the assumed time required to close out a defaulting position.

SEBI currently mandates a two-day MPOR.

Investors argue that improvements in market infrastructure, including real-time surveillance systems, intraday margin calls, automated alerts and API-based risk management tools, have reduced liquidation risks and should be reflected in margin calculations.

One foreign hedge fund manager said derivatives traders in the United States typically access leverage through prime brokers, with financing determined by portfolio risk rather than fixed exchange requirements.

"Prime brokers give a leverage basis the riskiness of your portfolio. Practically everyone who trades (in US) uses that facility," he said.

Some market participants also argue that a two-day MPOR is too conservative for highly liquid index derivatives, where positions can often be closed within hours following a default event.

Covered Calls And Capital Efficiency

Investors have also raised concerns about the treatment of covered call strategies.

In the United States, United Kingdom, Australia, Canada and the European Union, covered calls generally do not attract additional margin because the investor already owns the underlying security.

"Indian exchanges, however, treat the derivatives and equity positions as independent portfolios, collecting margin on the short call as if the underlying holding did not exist," Bansal said.

Basu agreed that margin treatment should vary according to the characteristics of underlying assets.

"There will have to be a number of different bands for different kinds of underlying," he said.

Market participants argue that covered call writing contributes to options market liquidity. Higher margin requirements can discourage participation by hedgers, widen bid-ask spreads and reduce the efficiency of price discovery.

Push For Integrated Margining

Recent regulatory changes have largely focused on tightening risk controls rather than redesigning the overall framework.

SEBI introduced a 2% Extreme Loss Margin for short derivatives positions on expiry days. Basu said the measure also replaced the Short Option Maintenance Margin mechanism.

Foreign hedge funds and institutional trading desks are now calling for an integrated cash-and-derivatives margining framework that would allow equity holdings and derivatives positions within the same account to offset one another.

Such systems are common in several international markets and can improve capital efficiency by reducing excess collateral requirements.

Supporters of reform argue that risk-based margining and financial stability are not mutually exclusive. They contend that aligning margin requirements more closely with actual risk could make several trading strategies economically viable without weakening market safeguards.

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