SEBI Changes Margin Requirements for Cash and Derivatives Trading

Sebi

After making changes to the margin framework for commodity derivates in January 2020, Market Regulator SEBI has made amendments to the margin requirements in the cash and derivates segment.

Crux of the Matter

Market Watchdog Securities and Exchange Board of India (SEBI) has amended the margin framework for derivatives and cash segments, a move aimed to enhance the risk management system. SEBI’s Risk Management Review Committee has outlined that the changes are in tandem with the dynamic nature of the market and that it will increase efficiency in the market.

With respect to the Cash Market, SEBI divided the Value at Risk (VaR) margin rates on the basis of liquidity into three categories.

For the Derivates segment, SEBI updated the calculation of volatility, calendar spread charge on various products, extreme loss margin, the margin on consolidated crystallized margin and minimum charge on short option.

There shall be no separate short option minimum charge for index derivatives, single stock derivatives, currency and interest rate derivatives.

– SEBI on charges on Short Option

Most importantly, Sebi put these provisions of upfront additional margin for stocks that are highly volatile.

1. Securities that have an intra-day price movement of more than 10% on the basis of the formula, Maximum of (High-Low), (High-Previous Close), or (Low-Previous Close) for 3 or more days in the preceding 1 month in a particular stock market will attract a minimum total margin equal to the maximum intra-day price movement in the respective market in a month. “This shall be applicable till the monthly expiry date of the derivative contract which falls after completion of three months from the date of levy,” as per SEBI.

2. Securities that have an intra-day price movement of more than 10% on the basis of the formula, Maximum of (High-Low), (High-Previous Close), or (Low-Previous Close) for 10 or more days in the preceding 6 months in a particular stock market will attract a minimum total margin equal to the maximum intra-day price movement in the respective market in 6 months. “This shall be applicable till the monthly expiry date of the derivative contract which falls after completion of one year from the date of levy,” as per SEBI.

The changes will be applicable from May 1, 2020.

Curiopedia

Margin (Finance) is collateral that the holder of a financial instrument has to deposit with a counterparty (most often their broker or an exchange) to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following:
– Borrowed cash from the counterparty to buy financial instruments,
– Borrowed financial instruments to sell them short,
– Entered into a derivative contract.
The collateral for a margin account can be the cash deposited in the account or securities provided, and represents the funds available to the account holder for further share trading. More Info

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