50% cash margin leaves derivatives traders in a bind

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A large number of stock brokers have started requiring a 50 percent cash margin from traders in the Indian equity derivatives market against the regulatory requirement of 20 percent. Traders say this caused them unnecessary hassle in trading the futures segment as the 20% margin requirement was sufficient to take care of any volatility risk.

Lately, the market regulator SEBI has tightened the margin standards, increasing the margin requirement. However, since the market hit a new high this year, brokers have become very cautious, experts said. Brokers have unilaterally started imposing penalties on traders who do not maintain a 50 percent cash margin for trading in the F&O segment. The penalty includes interest of 9 percent per annum on the shortfall in cash margin.

High volatility

An official at a brokerage firm in Mumbai said they were apprehensive as the participation of retailers increased sharply than before in the derivatives segment. “We are insisting on a 50% margin to prevent retail traders from going too far with derivatives trading, as the markets are reaching new highs and high volatility can lead to a stack of debt,” said the responsible. M&O trading is experiencing unprecedented growth since dozens of new stocks were introduced to the segment by the National Stock Exchange.

According to the latest data from NSE, retail investors hold 68% of all index calls and short calls, 55% and 71% of index long put positions and ” index short put options, 57% of long index futures and 41% of short index positions, 56% of long positions in equity futures and 7% of short positions in futures actions.

Girish Sodani, Head of Zone and HNI Strategies, Swastika Investmart, said: “Yes, we have observed that in our zone many of our low cost day trading clients have moved from cash and futures segments to options trading. the latter require very low margins; but these initial margins are a big backlash to traders who trade smoothly in options trading. Over the past year, SEBI has introduced several new standards regarding margin and pledging of shares, including initial margins, but the reduction of option leverage and cash margin on option trades proves difficult for clients and brokers with low investment, he added.

Margin commitments

Traders say customers will have a hard time meeting margin commitments towards the end of each quarter because under current SEBI rules all customer positions must be settled and cash in their general account returned to them. If a trader has an option position based on cash, he may need to align his strength position, they added. One important easing is the quarterly settlement as it affects derivatives traders, Sodani said.


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