The Securities and Exchange Board of India (SEBI) is proposing a comprehensive restructuring of equity derivatives margin rules, marking a significant shift from current regulatory approaches. According to reports from Moneycontrol, the proposed changes represent a move from blunt curbs to smarter mathematical calculations in derivatives margin requirements, with the regulator considering a broad revamp of the equity derivatives margin system to encourage long-term hedging while discouraging excessive speculation around contract expiry days.
The proposed regulations will stretch long-dated contract windows to provide market participants with extended trading opportunities. As reported by Moneycontrol, this extension aims to accommodate longer-term investment strategies and reduce the pressure of compressed trading windows that have historically limited derivatives market participation. The changes are specifically designed to make it easier for traders and institutions to hedge risks over longer periods without facing disproportionately high margin requirements.
SEBI is planning to widen risk models to incorporate a broader range of market variables and scenarios. According to the latest reports, the regulator is examining changes to the SPAN-based risk model used by clearing corporations, with the proposal to 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), which could significantly reduce margin requirements for risk-defined portfolios.
The new framework will reward hedged positions with lower margins, providing an incentive structure that encourages risk-managed trading strategies. 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%. As reported by Moneycontrol, this approach recognizes that properly hedged positions typically carry lower systemic risk compared to unhedged speculative positions, potentially reducing overall market leverage and systemic risk exposure.
Despite the expanded framework, SEBI is maintaining controls on expiry-day speculation to prevent excessive short-term positioning that can amplify market volatility. The regulator is unlikely to ease margin requirements on expiry days, when speculative trading tends to peak, instead planning to keep higher margins in place to discourage excessive risk-taking around contract settlements. Additionally, 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, while also imposing an additional 3% ELM on large conversion and reversal trades above specified thresholds.
