India's market regulator is evaluating a broad revamp of the country’s margin framework for both cash equities and derivatives trading as it looks to align risk management systems with today’s market structure, according to three people aware of the development.
The review is being discussed by the Risk Management Review Committee (RMRC) of the Securities and Exchange Board of India (Sebi), said these people on the condition of anonymity. The committee is examining whether the current framework, built largely around the Standard Portfolio Analysis of Risk (SPAN) model introduced more than two decades ago, remains sufficient for modern market risks. SPAN is a risk-based margining system used by exchanges to calculate how much collateral or margin a trader must keep.
The discussions are preliminary and the committee is far from reaching a decision, the people said.
“RMRC is discussing how to reduce the dependence on the age-old classical SPAN model and make the overall margin framework more suitable for today’s market risks. There are several new risks such as cybersecurity, artificial intelligence and algorithmic trading along with high volumes,” the first of the officials cited earlier said.
They added that certain components of the SPAN margin and other adjoining margin systems are likely to change.
Queries emailed to Sebi remained unanswered till press time.
The emerging AI-linked risks have been flagged by the market regulator in the recent past. Sebi, in an advisory issued on 5 May, warned that fast-evolving artificial intelligence (AI) tools could amplify cyber vulnerabilities across the securities ecosystem. It also constituted a task force named cyber-suraksha.ai, which includes market infrastructure institutions and other related stakeholders.
The regulator said that AI-driven vulnerability detection tools such as Claude Mythos can detect weaknesses at scale and speed, raising the possibility of their exploitation. It also raised concerns about data confidentiality, application integrity, and the reliability of outputs.
How the current system works
SPAN, or Standard Portfolio Analysis of Risk, was originally developed by the Chicago Mercantile Exchange and adopted by exchanges globally, including Indian exchanges in 2000. The system calculates the worst probable one-day loss on a derivatives portfolio using statistical assumptions based on historical volatility.
At the core of SPAN is the concept of the Margin Period of Risk, or MPOR, which estimates the potential loss that can occur before positions can be closed out. This is calculated using the Price Scan Range, derived from daily volatility in the underlying stock or index. When introduced, the framework used three standard deviations of volatility for index contracts and 3.5 standard deviations for stock derivatives.
The current margin regime in India spans both the cash and derivatives segments. In cash equities, brokers are required to collect upfront Value-at-Risk (VaR) and Extreme Loss Margins (ELM) before trades are executed. In the cash segment, securities are classified into three groups depending on liquidity and volatility. Highly liquid Group I stocks attract a minimum VaR margin of 9% of the position value , while Group II stocks carry a floor of 21.5%. Illiquid Group III stocks can attract margins as high as 50-75%, depending on trading frequency. Exchange-traded funds tracking broad-based indices attract lower minimum VaR margins of 6%.
Apart from VaR margins, exchanges levy Extreme Loss Margins of 3.5% on stocks and 2% on broad-based index ETFs to protect against sudden market shocks. Mark-to-market (MTM) losses are also collected daily by revaluing positions against closing prices. Together, these layers form the core of risk management in the cash market.
In the derivatives segment, apart from the SPAN margin, additional ELM charges are imposed at 2% of notional value for index derivatives and 3.5% for stock derivatives, with even steeper charges for deep out-of-the-money options and expiry-day positions.
Industry concerns
These are some of the margins, that along with others, have created a layered and collateralized market structure that has helped improve systemic safety. However, industry participants said that it has also sharply reduced trading flexibility.
“When you want to trade, margins are present to protect the fall. If I sell a stock which I’m already having in my account there is no need for asking for an initial margin. Correlation between purpose for margin charge and actual margin needed is not present,” said K. Suresh, former president and a board member of Association of NSE Members of India (ANMI).
“Adverse situations are also not very frequent. So, in day-to-day market participation, margins are not needed so heavily. When law and order problems are expected then a curfew can be imposed. But a curfew need not be imposed everyday citing there may be a law and order problem,” he added.
The objective of the revamp may not be to reduce margins for the cash and derivatives segment, said the people cited earlier. The second person said that the matter may also soon be taken up in the Industry Standards Forum (ISF), an industry body that sets uniform implementation standards.
The market regulator is also taking steps to reduce margins in the derivatives segment. Mint reported in December 2025 that Sebi is likely to reduce margins on equity derivatives on non-expiry days to encourage big traders to place longer-term bets rather than focus solely on the expiration days. The matter was being discussed in the RMRC committee.