SEBI’s New Risk Measures For Derivatives To Increase Costs

Cost of trading in India's equity derivative markets will rise as the market regulator increased margin requirements to manage risks.

From June 1, trading members will have to collect an upfront exposure margin from clients, according to a May 2 circular by the Securities and Exchange Board of India. This will be in addition to the SPAN margin—named after the software that calculates it—that they already pay for executing derivative trades.

The move seems more to protect defaults as the regulator is moving to physical settlements from cash, Amit Shah, technical and derivative analyst at BOB Capital Securities, said. It will definitely hit most of the retail clients as on an average the contract value is around Rs 8 lakh for F&O stocks, he said. Considering a 5 percent exposure margin, the retail client [now] needs to maintain on an average around Rs 40,000 more margin with the broker.”

Exposure margin is 3 percent of the contract value for index options and index futures and 5 percent for stock futures and stock options, according to the National Stock Exchange's website. Higher costs may also impact volumes. That's because almost half of the F&O trades fall under the client category.

The new provisions are in line with currency derivatives segment where trading members collect both SPAN and exposure margins. They are collected and reported to the exchange or clearing corporation.

SEBI took the decision after considering feedback from clearing corporations and the recommendations of its risk-management review committee, the regulator said. The new provisions will be implemented from June 1.