The Securities and Exchange Board of India’s (SEBI) recent move to revise the risk management framework by tweaking the margin requirements for equity derivatives segment is facing resistance with broker associations demanding a roll back or at least an indefinite postponement of the new norms that will come into effect from Monday.
Brokers say that the proposed margining structure will only increase manifold the cost of trading in equity derivatives — also known as F&O, or futures and options, in industry parlance — without any real benefit in terms of reducing risk, which is the motive of the SEBI. The Association of National Exchanges Members of India (ANMI), which is the umbrella body of capital market brokers, has written to the SEBI highlighting the concerns and plans to take up the issue with the regulator on Monday.
“ANMI is of the opinion that many components of margin levied/proposed to be increased are unwarranted, excessive, bear zero-to-very-low correlation to risk, and therefore will result in unprecedented damage to the functioning and growth of the equity derivatives market,” stated an ANMI submission to SEBI.
“ANMI believes that applicable margin should correlate highly with risk and not exposure/open interest... Therefore, SEBI moves on margins, has less to do with risk management and more to do with controlling open interest and volumes in the F&O markets,” it added.
The matter goes back to December 17, 2018, when the SEBI issued a circular proposing revised margins based on the recommendations of the Risk Management Review Committee.
Among other things, the regulator increased the so-called Margin Period of Risk (MPOR) to two days from the current one day to ascertain the total margin. Further, exchanges were directed to calculate the MPOR for each equity derivative product based on liquidity and scale up the initial margins and exposure margins accordingly.
In a letter written to the SEBI, ANMI has stated that the proposed margins are “unscientific and excessive” and that it would “practically shut down” all hedging and and proprietary trading in the market.
“The Indian markets have been operating for over 15 years now and rich data is available to design a robust margining framework. We recommend that SEBI constitute an expert committee towards reframing the entire margining framework. ANMI should be represented on such a committee,” it added.
