Sebi Proposes New Margin Rules for Single-Stock Derivatives

India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), has put forward a significant proposal to tighten rules for trading single-stock derivatives. The new framework focuses on margin requirements, which are the collateral traders must post to cover potential losses. This move is designed to make the market safer for everyone involved.

Targeting Calendar Spread Strategies

The proposed changes specifically target a popular trading strategy known as a calendar spread. In this strategy, a trader takes offsetting positions in the same stock derivative but with different expiration dates. For example, an investor might buy a futures contract for a stock expiring in June and simultaneously sell a contract for the same stock expiring in July.

Currently, such offsetting positions benefit from lower margin requirements because the risk is considered partially hedged. The new Sebi proposal seeks to change this treatment on a critical day: the day the near-month contract expires. On expiry day, the regulator proposes that the margin benefit for these offsetting positions will no longer be available.

Aim to Reduce Systemic Risk

Sebi’s primary goal is to reduce risk for both individual traders and the trading members, or brokers, who facilitate these transactions. On the day a contract expires, prices can be exceptionally volatile as traders rush to settle or roll over their positions. The existing margin rules, Sebi believes, may not adequately capture the heightened risk during this period.

By requiring full margins on expiry day, the regulator aims to ensure that traders have sufficient skin in the game to cover potential losses. This protects not only the traders themselves from sudden, large losses but also safeguards the trading members and clearing corporations from defaults. In essence, it strengthens the entire financial system’s resilience against a chain reaction of failures.

Potential Impact on Market Participants

If implemented, the new rules will directly affect traders and institutions that frequently use calendar spreads in single stocks. Their cost of trading will increase on expiry days, as they will need to commit more capital to maintain their positions. This could lead to reduced activity in such strategies or encourage traders to unwind their positions earlier to avoid the higher margin requirement.

For the broader market, the change is viewed as a prudent step toward aligning Indian markets with global risk management practices. It underscores Sebi’s ongoing focus on ensuring market stability, especially in the derivatives segment, which has seen massive growth in recent years. The proposal is currently open for public feedback, allowing market participants to share their views before any final rules are enacted.