SEBI is reportedly considering a broad revamp of the equity derivatives margin system to encourage long-term hedging while discouraging excessive speculation around contract expiry days.
The regulator is evaluating proposals to extend the standard margin framework to 13-month index derivatives, expand SPAN risk scenarios and reduce margin requirements for risk-defined portfolios such as calendar spreads.
While hedged positions could benefit from lower margins, SEBI plans to retain elevated expiry-day margins, tighten collateral checks and introduce additional safeguards for large conversion and reversal trades.
SEBI Eyes Major Derivatives Margin Overhaul to Boost Long-Term Hedging
SEBI is considering changes to derivatives margin rules to encourage long-term hedging, lower margins for risk-defined trades and curb expiry-day speculation
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Summary
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The Securities and Exchange Board of India (SEBI) is considering a comprehensive overhaul of the equity derivatives margin framework to encourage long-term hedging while curbing excessive speculation around contract expiry days, Moneycontrol reported, citing sources.
According to the report, the proposals are at an early stage and are aimed at making margin requirements more efficient for risk-defined trading strategies without diluting safeguards against excessive market risk.
"The purpose of the review is to ensure efficient margins for risk-defined portfolios, including calendar spreads, and incentivise trades in long-dated index option contracts," one source told Moneycontrol.
Focus on Long-Dated Derivatives
One of the key proposals under consideration is extending the standard margin framework for index derivatives with residual maturities of up to 13 months, compared with the current limit of nine months.
At present, contracts with maturities beyond nine months are treated as long-dated derivatives and are subject to a separate margin regime that market participants say is more capital-intensive.
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The proposed change is intended to make it easier for traders and institutions to hedge risks over longer periods without facing disproportionately high margin requirements.
Risk Model May Become More Granular
SEBI is also examining changes to the SPAN-based risk model used by clearing corporations.
The proposal would increase the number of risk scenarios evaluated from 16 to 44, enabling a more comprehensive assessment of potential portfolio losses.
The regulator is also considering linking the Extreme Loss Margin (ELM) to one-tenth of the Price Scan Range (PSR), subject to prescribed limits. According to the report, this could significantly reduce margin requirements for risk-defined portfolios.
Under the proposed framework, margins for certain hedged index option strategies could decline by nearly 50%, while calendar spreads may see reductions of around 30%. Margin requirements for outright directional bets, however, are expected to remain largely unchanged.
Expiry-Day Curbs to Stay
Despite the proposed relaxations, SEBI is unlikely to ease margin requirements on expiry days, when speculative trading tends to peak.
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The regulator instead plans to keep higher margins in place to discourage excessive risk-taking around contract settlements.
The report also said SEBI is evaluating a tiered calendar spread charge for index options, replacing the current flat 1.75% levy with charges ranging from 1.25% to 3.5%, depending on the maturity gap.
Other proposals include tightening the Risk Reduction Mode framework, revising margin rules for illiquid stock derivatives and imposing an additional 3% ELM on large conversion and reversal trades above specified thresholds.
According to another source quoted by Moneycontrol, the broader objective is to make the derivatives margin framework more efficient while encouraging traders to adopt risk-defined strategies instead of speculative positions.