The Securities & Exchange Board of India (Sebi) is looking to ease the margin requirements for longer-term derivative contracts in order to give a fillip to the shift from excessive trading in the weekly contracts, a source close to the development said.
The regulator has received representations on the same from particularly global market participants. Sebi is concerned over volume in the derivatives segment concentrated in weekly index options. Around 90% of volumes of both the exchanges are in weekly contracts.
Sebi believes that one of the main reasons for longer term contracts not being popular is higher margins. Currently, the extreme loss margin (ELM), which over and above added to the basic margin. It is charged by exchanges to cover losses from severe, unexpected market volatility that is not accounted for by the standard value at risk (VaR) margin.
What did Omar Kishan say?
Osho Krishan, chief manager, technical and derivatives research at Angel One explained the margin is higher in the medium term and longer term contract because of the theta effect as it accounts for extended risk horizon and increased potential volatility during that time.
According to an expert, when somebody is doing a calendar spread from one month to three months, or three months to six months, then the ELM is added on both sides, making the margin really high. Whereas, it is actually a spread trade. Similarly, in a long-term trade of stock A versus stock B, when traders are going long on one and short on the other, then also ELM is added on both sides.
Krishan added while the volumes in futures have decreased in the past 3-4 months, that in options have remained the same. Earlier this month, an NSE circular had said that it will roll out a pre-open session for equity derivatives from December 8. The pre-open session will be conducted using a call auction mechanism for 15 minutes, from 9:00 am to 9:15 am. Krishan sees this as a positive for markets as he noted that the first 15-20 minutes when the market opens, there is a spike in volatility and that will be taken care of like how it happens in the cash market.
What did Tuhin Kanta say?
Tuhin Kanta Pandey, chairman Sebi, in his speech at the Goldman Sachs India CIO Conference said on Wednesday, “We aim to deepen the cash equities market to spur further capital formation. A working group is being set up to comprehensively review the short selling and Securities Lending and Borrowing frameworks, to facilitate inter-linkage between the cash and derivatives markets. We are also committed to introducing a closing auction session, in consultation with all stakeholders.