INSUBCONTINENT EXCLUSIVE:
The cost of hedged trades will soon dip in the Indian stock derivatives market.
Traders using combinations of equity futures and options to
create strategies that would result in limited losses could see margins for such bets decline significantly
the cost of such trades coming down by 60-70 per cent, two people familiar with the matter told ET
The plan to lower initial margins comes in the wake of a growing clamour among market participants to ease growing pressure of high trading
costs.
Options segment contributed 92 per cent to the average daily turnover of Rs 16 lakh crore in the equity derivatives segment in
The panel is said to have agreed in principle to the proposal to reduce margins on hedged positions, said one of the two people in the know
The regulator is expected to come out with the rules soon, he said.
Initial margins that traders must pay exchanges include SPAN and
Standard Portfolio Analysis of Risk (SPAN) is an upfront margin that traders pay up at the time of placing their trades
It is a percentage of the value of the trades based on the software SPAN
Exposure margin, a concept unique to few markets like India, is an additional margin levied that brokers also collect from their clients for
trading in derivatives at the time of initiating a trade.
Currently, the total margin that traders pay upfront for a Nifty futures trade is
Out of this, the SPAN mar gin is about 7 per cent, while exposure margin is 3 per cent.
As part of the margin rationa lisation exercise,
Sebi is likely to reduce the contribution of ex posure margin and increase that of SPAN margin in the up front margin calculation, said one
of the two people quoted above
The regulator could also ease the variables that form the SPAN margin, the person said which could result in a drop in margins for hedged
trades.
Brokers said the reduction in margins on hedged positions will benefit derivative traders, especially those betting on indices and
mix of options contracts or blend options and futures that end up being mutual hedges, thereby capping losses
Such trading bets are usually done by sophisticated traders with deep knowledge of the intricacies of the derivatives markets
The less experienced stick to plain vanilla strategies like buying or selling options or futures but many of such trades tend to be fraught
The benefit of lower margins will not be available for basic trades or ones where an investor buys futures or options as a hedge against his
margins for hedged trades, it will be good for the derivatives segment
finalize rules.
Brokers and traders have been crying hoarse, seeking a reduction in overall margins for derivative trades as the increase in
trading costs had hit their profitability.
Sebi and exchanges have been tightening margin requirements for futures and options in the last
couple of years.
Earlier this month, exchanges asked stock brokers to mandatorily collect the entire initial margin before a trade from
clients even for transactions that are not carried forward to the next day.
This is expected to impact day traders, who took bets by
bringing in just a fraction of the value of the transaction upfront.
