SEBI Weighs Margin Cut to Boost Non-Expiry Day F&O Trading

The Securities and Exchange Board of India (SEBI) is considering a reduction in margins for equity derivatives trading on non-expiry days to encourage longer-term positions and reduce excessive concentration of trading activity on weekly options expiry days.

What Are Margins in F&O Trading?

• Margin: Upfront amount an investor must deposit to initiate a derivatives trade.
• In India, exchanges require:
  • SPAN (Standard Portfolio Analysis of Risk) margin
  • Extreme Loss Margin (ELM) — additional margin based on notional contract value
• SPAN covers ~99.975% of risk scenarios, while ELM acts as a risk guardrail.

Why SEBI Is Considering This Move

• Derivatives trading in India is heavily skewed towards expiry days
• High margins on non-expiry days:
  • Discourage positional and hedged trades
  • Encourage short-term, high-frequency expiry-day strategies
• SEBI aims to:
  • Deepen the derivatives market
  • Promote risk-mitigated, longer-tenure positions
  • Improve market quality and stability

Current Margin Structure in India

Components of Margin

• SPAN Margin
  • Risk-based margining system developed by CME
  • Covers 99.975% of risk scenarios
• Extreme Loss Margin (ELM)
  • Additional margin imposed by Indian clearing corporations
  • Based on notional contract value
  • Acts as a guardrail against extreme volatility

Key Difference from Global Practice

• Globally: Mostly SPAN-only
• India: SPAN + ELM, making margins significantly higher

Proposed Changes Under Discussion

For Non-Expiry Days

• Hedged portfolios
  • ELM may be reduced from 2% → 0.5–1%
• Unhedged portfolios
  • ELM likely to remain at 2%
• Objective:
  • Reward risk-reduced (hedged) positions
  • Encourage non-expiry day participation

For Expiry Days

• Margin structure to remain stringent:
  • SPAN + 4% ELM
• Rationale:
  • Higher volatility and settlement risk on expiry days