Sebi Tightens Margin Rules for Single-Stock Derivatives to Enhance Market Stability
The Securities and Exchange Board of India (Sebi) has introduced stricter margin regulations for traders operating in single-stock derivatives, aiming to mitigate the risk of abrupt margin shortfalls and potential market disturbances. In a significant move, the market regulator has withdrawn a key margin benefit previously available on the expiry day for these contracts, aligning the rules more closely with those governing index derivatives.
Key Changes in Margin Framework
In a circular released on Thursday, Sebi announced that calendar spread margin benefits will no longer be applicable on the expiry day for single-stock derivative contracts that mature on that specific day. This decision, which will become effective in three months, addresses vulnerabilities identified in the current system. Previously, traders in single-stock derivatives could enjoy margin relief even when one leg of their spread was expiring, a practice that Sebi now deems risky.
Understanding Calendar Spreads and Their Risks
A calendar spread is a popular trading strategy where a trader takes positions in the same stock but with different expiry dates, typically involving buying one contract and selling another. Due to the partially offsetting risks of these two legs, exchanges have traditionally allowed lower margins for such positions. However, Sebi highlighted that continuing this benefit on expiry day could lead to significant issues.
The regulator explained that once the expiring contract lapses, traders are left with a single open position, which can be exposed to sharp price movements. This scenario increases the likelihood of margin shortfalls, putting undue pressure on both traders and brokers who may have limited time to collect additional funds.
Revised Margin Requirements and Implementation
Under the revised framework, if a calendar spread includes a contract that is expiring on a given day, no margin benefit will be available for that trading session. Traders will be required to post full margins in such cases. However, spreads that involve only future expiries will continue to receive the usual margin relief.
For example, consider a stock with contracts expiring in the current month, the next month, and a far month. Any spread involving the current-month contract will lose its margin benefit on its expiry day. In contrast, a spread between the next-month and far-month contracts will still qualify as a calendar spread and attract lower margins.
Rationale Behind the Regulatory Move
Sebi's decision stems from concerns raised by trading members regarding the risks that can emerge on expiry days. The issue was thoroughly discussed with Sebi's Secondary Market Advisory Committee before the final decision was made. The primary objective is to prevent abrupt jumps in margin requirements after expiry, thereby ensuring smoother market operations.
By eliminating the margin benefit on the expiry day itself, Sebi aims to provide traders and brokers with adequate time to manage their positions. This could involve adding margins, rolling over positions to later expiries, or closing them altogether, thus reducing the potential for market disruption.
Clarifications and Next Steps
Sebi has clarified that margin calculations for calendar spreads on non-expiry days will remain unchanged. To implement the new requirement, stock exchanges and clearing corporations have been directed to make necessary system adjustments and update their byelaws and rules accordingly.
This regulatory update underscores Sebi's ongoing efforts to enhance the robustness of India's financial markets, ensuring that trading practices evolve to address emerging risks while maintaining a level playing field for all participants.
