Sebi ends calendar spread margin benefit in single-stock derivatives

Capital markets regulator Sebi has tightened margin norms for single stock derivatives, removing the calendar spread margin benefit on expiry day for contracts that are set to expire, a move aimed at reducing sudden margin shocks and operational risks for brokers and investors.

In a circular issued on February 5, the regulator said that traders holding offsetting positions across different expiries in single stock derivatives will no longer get the benefit of lower margins on the expiry day of the near-month contract.

Until now, such calendar spread benefits were available, allowing traders to post lower margins when they held long and short positions in the same stock across different expiries.


Sebi said the decision was taken after receiving representations from trading members and following discussions with its Secondary Market Advisory Committee. The regulator flagged the risk that arises on expiry day when one leg of a calendar spread expires, potentially leaving traders with an open position and a sharp jump in margin requirements with little time to arrange additional funds.

To explain the change, Sebi gave an illustration. If a stock has monthly derivative expiries on the 29th, 30th and 31st of a month, then on the 29th -- the expiry day of the month contract -- calendar spread benefits will not be available for positions involving the 29th expiry paired with either the 30th or 31st expiry. However, positions involving only the 30th and 31st expiries will continue to receive calendar spread margin benefits even on the 29th.

The regulator clarified that there is no change in margin treatment for calendar spreads involving contracts that are not expiring on that day. In other words, the restriction applies only to positions where one leg is expiring on the same day.

Sebi said the change will align margin treatment in single stock derivatives with the existing framework for index derivatives, where calendar spread benefits are already not available on expiry day for expiring contracts. According to the regulator, this alignment will also give trading members and clients adequate time to either bring in additional margins or roll over or close positions on expiry day itself.

The circular noted that without such a framework, there is a risk of a sudden and sharp increase in margin requirements on the day after expiry, especially if the remaining open leg of a spread moves adversely. This can create settlement and risk management challenges for brokers, particularly when clients are unable to meet margin calls at short notice.

The new rule will come into effect three months from the date of the circular. Sebi has directed stock exchanges and clearing corporations to make the necessary system changes and amend their bye-laws and regulations to implement the revised margin framework.