Derivative Margin Requirements And Rules
I. Legal Basis of Margin Requirements
- Securities Contracts (Regulation) Act, 1956 + SEBI Act, 1992
- SEBI Master Circular for Exchange Traded Derivatives - 1st April 2013
- SEBI Circular June 01, 2018 - Additional Risk Management Measures
- SEBI Peak Margin Circulars - July 20, 2020 & Dec 2020 onwards, implemented in 4 phases
SEBI has specified mandate for equity derivatives that following shall be included in client margins which shall be collected and reported: 1. initial margin; 2. exposure margin/ extreme loss margin; 3. calendar spread margin
II. Types of Margins - What You Must Collect
| Margin Type | How Calculated | When Applicable |
|---|---|---|
| SPAN Margin / Initial Margin | SPAN Risk Array - covers 99% VaR over 1 day | All F&O positions |
| Exposure Margin / ELM | 3% for Index, 5%+ for stocks - over SPAN | All F&O positions |
| Extreme Loss Margin | For highly volatile stocks | Stock F&O |
| Calendar Spread Margin | Discounted - ∼25% of normal | Spread positions |
| Mark-to-Market (MTM) | Daily settlement loss | To be paid in cash T+1 |
| Delivery Margin / Additional Margin | 2% extra for short positions on expiry day, plus SEBI additional risk margin in volatility | Last Thursday + special periods |
| Concentration Margin | When open interest exceeds limits | Large positions |
III. The 5 Golden Rules Now
Rule 1: 100% Upfront Collection
Stockbrokers will face a penalty if margins collected from traders is less than 100% of trade value in case of cash market and additional Span + Exposure for derivatives trade. SEBI requires brokers to collect margins upfront before allowing intraday trades.
No upfront = violation. Broker cannot say "I will collect EOD".
Rule 2: Peak Margin, Not EOD Margin
Margin is calculated on highest intraday position, not closing position.
Peak Margin is the maximum margin an investor needs to maintain to cover the highest value of their position during the day. With new margin rules, there are significant changes: Full upfront margin requirement + Peak margin calculation based on peak margin utilised during trading day rather than at close.
Exchanges take 4 random snapshots. Example: You had Rs 50 lakh position at 11am, closed to Rs 1 lakh at 3:30pm - margin will be charged on Rs 50 lakh.
The peak position of the customer was Rs 50 lakh during the day... margin requirement will be measured on Rs 50 lakh... both peak margin requirement and end-of-day margin requirement will be registered
Rule 3: No Leverage
Traders must have 100% margin to trade derivatives... Brokers can not give any leverage to clients. SEBI's peak margin rules essentially limit how much traders can borrow (margin) from brokers.
Old 20-40x intraday leverage is gone. Now near 5x cap only.
Rule 4: Client Segregation + Reporting
- Broker must report client-wise margin file to Exchange daily before 12pm next day
- By not reporting correct margin to Exchange in CD and FO segment, broker violates SEBI Master Circular
- Margin shortage can attract penalties under exchange regulations
Rule 5: Recent Relaxations & Tightening (2024-26)
- Real-time EPI waiver: If you do Early Pay-In of shares sold, clearing corp will not collect margin for subsequent buy up to that amount
- Nov 20, 2024 Reform: Option traders need 2-3x more margin on expiry week to curb volatility
- July 2026 proposal: SEBI planning to replace flat 20% upfront in cash market with risk-based lower margin for liquid stocks
IV. Case Laws You Must Know
1. GRD Securities Ltd. v. NSE [SAT 2019 SCC OnLine SAT 36] - False Reporting
NSE inspection found GRD falsely reported margin of Rs 2,05,43,947 in CD segment. DAC imposed penalty equal to shortfall. SAT held:
Upfront collection of margin is an important mechanism... But discretion in imposition of penalty can be exercised... While SEBI circular is quite mechanical in directing Exchanges to impose fixed penalty but for only violation imposing such penalty is out of proportion and can ruin an entity.
Final: Reduced to Rs 50 lakh + 1-day suspension in CD. Principle: Stock Exchanges not to follow SEBI circulars mechanically
2. SMC Global Securities Ltd. vs SEBI (SAT 31 Jan 2014)
Broker argued SEBI cannot re-investigate margin short-collection when NSE already did, citing circular dated Aug 10, 2011 on Short-collection/Non-collection of client margins. SAT rejected - SEBI has concurrent jurisdiction.
3. FSPL (SEBI Ex-parte Order 2018)
Broker pledged client securities to raise funds and did not report correct margin in FO and CD. Held violation of Clause A(1) and (5) Code of Conduct for stock brokers + SEBI Master Circular.
4. Grishma Securities Pvt Ltd vs SEBI (SAT Oct 28, 2013)
No circular authorizes the use by a broker of funds and/or securities of clients to cover margin... Such action is, in fact, prohibited.
Broker using one client's funds for another's margin = penalty under Regulation 26(xiii) of Stock Brokers Regulations.
5. Rakhi Trading Pvt Ltd (Supreme Court) - Synchronized F&O Trades
SEBI imposed Rs 1.8 cr for creating artificial volumes in F&O via reversal trades. SAT had set aside in 2011, Supreme Court restored SEBI order. Established SEBI can impose severe penalty even on smallest manipulations in derivative segment.
6. Reliance Industries Ltd. - RPL F&O Fraud 2007
Through March 2017 order, SEBI banned RIL from equity derivatives for 1 year and directed disgorgement of ~Rs 1000 cr for fraudulent trading. SAT upheld disgorgement of Rs 447.27 cr.
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