Sebi Likely To Revamp F&O Margin Framework To Reward Hedged Trades, Discourage Expiry-Day Bets

The Securities and Exchange Board of India (Sebi) is weighing a broad revamp of the equity derivatives margin framework to encourage hedging and curb excessive speculative trading around contract expiries. The regulator is exploring proposals that would lower margin requirements for risk-defined strategies, such as calendar spreads and certain hedged option positions, while leaving capital requirements for outright directional and naked-risk trades largely unchanged.

One of the key proposals under discussion is to extend the existing margin framework for index derivatives from contracts with up to nine months of residual maturity to those with up to 13 months. This is intended to encourage trading in one-year index derivatives, which market participants have long sought to improve liquidity in longer-dated contracts, according to a report in Moneycontrol.

Sebi is also looking at enhancing the Standard Portfolio Analysis of Risk (SPAN) framework, the derivatives margining system used by clearing corporations to assess portfolio risk. According to the report, increasing the number of risk scenarios beyond the current 16 could improve risk assessment, thereby enabling lower Extreme Loss Margin (ELM) for hedged portfolios without weakening safeguards for riskier positions.

As part of the proposed changes, the ELM for qualifying risk-defined portfolios could be linked to one-tenth of the Price Scan Range, potentially reducing it to around 1 per cent from the current 2 per cent. The report said that margins for some hedged index option strategies could decline by nearly 50 per cent, while calendar spreads may see reductions of roughly 30 per cent.

However, Sebi is not looking to ease margins on expiry days. Higher ELM requirements are expected to remain in place to discourage excessive speculative activity around settlement, the report added.

The regulator is also considering replacing the current flat 1.75 per cent Calendar Spread Charge for index derivatives with a graded structure based on the gap between contract expiries. Shorter-duration spreads could attract lower charges, while wider maturity gaps may face higher margins of up to 3.50 per cent to reflect additional basis risk, the report said.

Additionally, Sebi is evaluating an additional 3 per cent ELM on large conversion and reversal strategies above Rs 500 crore in index derivatives and Rs 100 crore in stock derivatives. Other proposals include standardising ELM calculations and tightening the Risk Reduction Mode framework by requiring margin sufficiency checks even for trades that reduce existing positions.

The broader idea, the report said, is to make the existing margin model in the derivative segment more efficient and to encourage the traders towards risk defined behaviour. The report added that the proposals are still at a preliminary stage and will require further discussions with market participants before any final decision is taken.