InvestorQ : What are the new margin concessions that the SEBI is likely to provide on hedged derivative positions and how would that change the costs for me as a trader?
indhumathi Sayani made post

What are the new margin concessions that the SEBI is likely to provide on hedged derivative positions and how would that change the costs for me as a trader?

Answer
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shrinidhi Rajan answered.
8 months ago


The secondary market advisory committee (SMAC) is expected to announce the details of the new margining system. The idea is that for speculative and trading positions in derivatives, the existing margining system will continue. However, the concessional margins will only be provided for hedged positions. Here are some examples.

· In case of long / short positions between indices with a high correlation, concessional margins will be allowed. For example, there is a correlation of over 0.95 between Bank Nifty and Nifty. So if you are long on bank Nifty and short on Nifty, then you only need to pay net margins.

· In case you are long on futures and also long on put option, here again your downside risk is limited. The margins will be charged on net basis here rather than on gross basis as is being done currently.

· In case you are long on call option and short on put options, then the concessional margin will be charged on the short option position due to the limited risk.

In all the above cases, the challenge is to identify and ring fence the hedged strategies since most transactions in F&O are fungible. The challenge will be ring-fence such strategies and also monitor that there is no breakage of one side of the strategy; in which case the hedge may not be valid any longer.