Sebi tightens margin rules for single-stock spreads on expiry day

MUMBAI: The Securities and Exchange Board of India (Sebi) has tightened margin rules for traders in single-stock derivatives, withdrawing a key margin benefit on expiry day to curb the risk of sudden margin shortfalls and potential market disruption.

In a circular issued on Thursday, the market regulator said calendar spread margin benefits will no longer be available on the expiry day for single-stock derivative contracts that mature that day. The move aligns single-stock derivatives with existing rules for index derivatives and will take effect in three months.

A calendar spread is a common strategy in which a trader takes positions in the same stock with different expiry dates, typically buying one contract and selling another. Because the risks of the two legs partly offset each other, exchanges allow lower margins for such positions.

Until now, traders in single-stock derivatives continued to receive this margin relief even on the day when one leg was expiring. Sebi said this could create vulnerabilities, particularly once the expiring contract lapses and the trader is left with a single open position.

The regulator said trading members had flagged risks that can arise on expiry day, and the issue was discussed with Sebi’s Secondary Market Advisory Committee before the decision was taken.

Under the revised framework, if a calendar spread includes a contract expiring that day, no margin benefit will be available for that trading session, and traders will have to post full margins. Spreads involving only future expiries will continue to receive the usual margin relief.

For instance, if a stock has contracts expiring in the current month, the next month and a far month, any spread involving the current-month contract will lose margin benefit on its expiry day. A spread between the next-month and far-month contracts will continue to qualify as a calendar spread and attract lower margins.

Sebi said the change is intended to prevent abrupt jumps in margin requirements after expiry. Once one leg of a spread expires, the remaining position can be exposed to sharp price movements, increasing the likelihood of margin shortfalls and putting pressure on both traders and brokers, who may have little time to collect additional funds.

By removing the benefit on expiry day itself, Sebi said traders and brokers will have time to add margins, roll over positions to later expiries, or close them.

The regulator clarified that margin calculations for calendar spreads on non-expiry days remain unchanged. Stock exchanges and clearing corporations have been directed to make the necessary system changes and update their byelaws and rules to implement the new requirement.

“The core objective of this measure is to reduce systemic risk and prevent sudden margin shocks when one leg of a spread expires,” said Raj Shah, co-founder and executive director at EPP Securities.

Shah added that the change could disrupt traders who rely on expiry-day margin offsets, forcing them to deploy more capital earlier or roll over or close positions ahead of expiry.

“This could modestly compress returns for margin-efficient strategies and reduce last-day flexibility, particularly for active spread traders, but the impact is expected to be largely behavioural rather than systemic,” he added.