Two regulatory panels at the Securities and Exchange Board of India (Sebi) are evaluating ways to revamp margins on hedged positions in the derivatives market, according to reports from Mint. The Risk Management Review Committee (RMRC) and the Secondary Market Advisory Committee (SMAC) are discussing ways to optimize and reduce margins wherever possible, with the primary objective being to make the margin framework for calendar spreads more efficient. This broader margin revamp initiative is part of Sebi's comprehensive effort to strengthen the derivatives ecosystem, as announced by Sebi Chairman Tuhin Kanta Pandey at the ET Now Market Summit in Mumbai.
A calendar spread is a derivatives strategy involving the simultaneous purchase and sale of two contracts on the same underlying asset with the same strike price, but with different expiration dates. As reported by Mint, for instance, a trader expecting stock stability over a month might buy a September ₹1,200 put option while selling an August ₹1,200 put option, both representing the same underlying stock and strike price but different expiry dates. This strategy acts as dynamic, low-cost hedges in options and futures trading, providing traders with cost-effective risk management tools.
The market regulator is holding discussions on introducing a tenure-based slab structure for extreme loss margin (ELM) for calendar spreads, according to Mint reports. This would mean higher margins for traders who hold longer tenure contracts, which are considered riskier as capital is locked up for longer periods of time. Currently, ELM charges are imposed at 2% of notional value for index derivatives and 3.5% for stock derivatives, with the combined margin reaching 3.75% for index derivatives and 5.7% for stock derivatives. The proposed framework aims to make calendar spreads more capital-efficient while maintaining adequate risk management.
If Sebi's committees reduce the combined charge to 2.25%, as proposed, the margin requirement would fall significantly, as reported by Mint. Using the Company A example where a trader creates a calendar spread with a ₹10 lakh notional value, the current framework requires ₹57,000 in combined margin (2.2% CSC plus 3.5% ELM for stock derivatives), while the proposed reduction would require only ₹22,500, freeing up ₹34,500 in capital while maintaining the hedged position. This would make calendar spreads significantly cheaper and more capital-efficient for investors.
The margin revamp comes as Sebi has flagged overbearing risks of speculative trades by retail investors, according to Mint reports. A July 2025 study by Sebi showed that about 91% of individual traders in equity derivatives markets suffered losses in fiscal 2025, with net losses of individual traders widening by 41% to ₹1.05 trillion in the same period compared to FY24. The National Stock Exchange recorded total options premium turnover of ₹142.42 trillion and total stock futures turnover of ₹320 trillion in fiscal 2026, while BSE recorded ₹48.22 trillion in options premium turnover and ₹873 crore in stock futures turnover. Sebi Chairman Pandey emphasized that markets will continue to face challenges and advised investors to "invest with a plan, understand the risk, diversify and stay disciplined."
