The proposed hike in margin requirements for equity derivatives will hurt the very same market, brokers said, adding margin framework should be linked to risk, not exposure or open interest. In a series of letters and representations to the Securities and Exchange Board of India (Sebi) the Association of National Exchange Members of India (ANMI) said higher margins will damage the functioning and growth of the equity derivatives market. Mint has reviewed copies of these representations.
A Sebi circular issued on 17 December effectively raises exposure-based margin in equity derivatives from 3% to 4.25%. This is among several steps taken by the regulator in the past one year to curb excessive speculation. Other steps include making physical settlement mandatory in a phased manner, and linking equity exposure to investors’ networth. According to ANMI, the new margin requirement has less to do with risk management and more to do with controlling open interest and volume in the futures and options markets.
“ANMI is opposed to idea of using excessive margining as a tool to control market volumes and exposures and ANMI believes margin should be taken at levels appropriate with the risk of a given portfolio (position)," an ANMI letter to the regulator said.
The association wants the regulator to define the margin framework to correlate with risk, not exposure or open interest.
“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," an ANMI representation to Sebi said.
“Sebi’s Secondary Markets Advisory Committee (SMAC) is meeting on Monday and may take up the issue for discussion among others," said a person aware of the matter, declining to be identified.
According to the broker association’s estimates for higher-value trade, the new margin requirement is as much as 55% higher than in the previous framework.