Mumbai: The Securities and Exchange Board of India (Sebi) is reviewing higher derivative trading margins after receiving representations from brokers but is unlikely to reduce them until the Lok Sabha elections are over since it expects high volatility during the period, two people with direct knowledge of the matter said.

As part of its attempts to reduce excess speculation, the market regulator on 17 December nearly doubled exposure-based margin in equity derivatives.

The margin was earlier 3% of the contract value for index options and index futures, and 5% for stock futures and stock options.

Under the revised framework, it is 11% for Nifty futures and 9% for Nifty options including upfront- and exposure-based margins.

India starts polling on 11 April for 2019 Lok Sabha elections, which will continue till 19 May. Votes will be counted on 23 May.

“Sebi has agreed to review the margin requirements considering the broker representations which claimed that these were too high and could bring trading to a standstill. But it is not in favour of any revision before elections as it anticipates huge volatility as India goes through the rounds of elections. These higher margins will help in better risk management," said the first of the two people quoted above, both of whom spoke under condition of anonymity.

Mint first reported on brokers protesting against the increased margins on 20 January.

Investors pay two different types of margins for trading in derivatives—Standard Portfolio Analysis of Risk (SPAN) margins, and exposure margins. SPAN is the upfront margin needed in a trader’s account at time of placing a trade in futures and options (F&O). Collecting exposure margins from clients was made compulsory last year. Subsequently, brokers were asked to collect extreme loss margins (ELM), based on clients’ open interest position. These are among the several steps taken by the market regulator in the past year to curb excessive speculation.

Other steps taken by the market regulator include making physical settlement mandatory in a phased manner and a proposal to link market exposure to net worth.

“Sebi has appointed a committee headed by NSE Clearing Ltd, which has commissioned a study to a professor of Indian Institute of Management Ahmedabad on whether the applicable margins are adequate or on the higher side. The ELM may be benchmarked against risk of the stocks," said the second of the two people cited above.

Sebi views higher margins as an effective risk management tool, but broker associations disagree. “The applicable margins are far in excess to what is actually required to manage risk; in fact, the margins are steep for positions that do not carry a proportionate risk. It seems that it is an attempt to control volumes and open interest rather than managing risk," said Rajesh Baheti, president, Association of National Exchanges Members of India or ANMI.

“Brokers have, in turn, appointed EY Ltd for a separate analysis to verify the impact of the higher margins. These reports will be submitted to Sebi’s Secondary Markets Advisory Committee (SMAC) which will make its recommendations when it meets in June on whether there is room to revise the margins or collateral requirements," said the second person.