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Sebi announces additional risk management measures for derivatives segment

Mumbai: The Securities and Exchange Board of India (Sebi) on Wednesday put in place additional risk management measures for the derivatives segment. These measures pertain to margin collection requirement and computation of liquid net worth for the equity derivatives segment. The provisions of the circular will be effective from June 1.

With regards to client's margin collection requirement in the equity derivatives segment, SEBI said that clearing members or trading members should include initial margin, exposure margin or extreme loss margin, calendar spread margin and mark to market settlements. Client margins are required to be compulsorily collected and reported to exchange or clearing corporation.

This is likely to have a negative impact on option writers and traditional brokers. The initial margin required for the positions is computed using a software called SPAN (Standard Portfolio Analysis of Risk). SPAN margin covers almost of the risk for of the day. Exposure margin is the margin charged over and above the SPAN margin which is the discretion of the broker. Failure to have requisite SPAN margin in the account can result in penalty being levied by the exchanges.

“These changes will impact the brokers who collect minimum margins for F&O trading especially option writers” said Nitin Kamath, founder and CEO, Zerodha. “Now brokers will have to collect span margin, exposure margin and MTM loses upfront, while the penalty on margin shortages is huge”.

The capital markets regulator said the decision was taken based on the feedback it got from clearing corporations and recommendations of the Risk Management Review Committee of SEBI. The regulator said these additional risk management measures need to be complied with and implemented by stock exchanges or clearing corporations for derivatives segment.

For the equity derivatives segment, the liquid net worth will be arrived at by deducting initial margin and the exposure margin/extreme loss margin from the liquid assets of the clearing member, said SEBI.

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