Why have margin requirements for trading F&O gone up from 30th Nov, 2018?
Important: From January 21, 2019, onwards, the provisions of the circular NCL/CMPT/39766 will be applicable instead. Check out this support article for more.
Exchanges in consultation with SEBI put out a circular on September 1st introducing Additional Surveillance margin (ASM) in addition to SPAN and Exposure. This increase in margin was to safeguard the ecosystem in case of extreme volatility in the market.
Currently, the Initial margin which includes SPAN and Exposure margins cover the risk of around 8% movement in indices and between 12.5% to 30% movement on stocks in one trading day. Due to the above circular, by November 2018 margin requirement for trading Index contracts would have gone up to 10% (increase in 2%) and for stocks between 17.5% to 35% (5% more).
This increase was planned by adding this additional surveillance margin (ASM) to the exposure margin, which would have meant no margin benefits on positions that hedge each other. So if a client had long SEPT Nifty future and Short OCT Nifty future, this additional exposure margin increase due to ASM would remain the same.
Exchanges have corrected this by amending the circular and ensuring that this additional increase in margin is on SPAN. Here is the link to the latest circular. Now, this additional margin will reduce on a portfolio level if there are positions that hedge each other in terms of risk. So in the case of the above example, this ASM would also reduce proportionately as SPAN margin requirement drops for holding Long SEPT Nifty future and Short OCT Nifty future.
The way exchanges have done this is, instead of adding Additional Surveillance Margin as specified in the above mentioned circular dated September 01, 2018 to the Exposure Margins, Price Scan Range (PSR) used for computation of Initial Margins has been amended, in steps (4 times), to increase the coverage of risk arising out of change in underlying Index / stocks to cover risk for 10% change in underlying indices and 17.50% change in underlying stocks.
Refer to this page on NSE website to know more about PSR & Sigma.
Hence margins for trading futures and options have gone up from November 30, 2018 onward. Make sure to have sufficient margins for your F&O positions to cover for this increase. Any shortfall in margin will attract margin shortfall penalty and may be squared off at the discretion of our Risk management (RMS) team.