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Decrease margin requirement in NSE derivatives by hedge positions December 02 2020NSE, BSE, Indian stock market, Volatility

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The NSE''s latest Margin Policy Framework was structurally modified as to how margins are measured with effect from 1 June 2020. Margins in F&O for naked positions need more margins and in contrast, hedged positions need much lower margins amidst the modification in framework.

About the changes-

· The Direct Implication: Depending on the position, the reduction in the margin threshold for different hedged option strategies with lower risk potential has been reduced to almost 70% of what was needed earlier based upon its position

· This new margin structure would allow the trader to decrease the total margin pay-in needed to hold these positions if a trader takes two mutually offsetting or hedged positions. It is assumed that this will decrease the projected hedging costs and dramatically increase the potential yields for these low-risk strategies, so it will raise open interest and potentially enhance the depth of the market.

· Although there is a possibility that the margin needed for unhedged or naked F&O positions is likely to go up marginally. For example, if you have a short position in Nifty Futures, for overnight positions, which used to require 1,00,000 per lot. You will need 1,12,000 now which is about 12,000 extra

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· The price scan range (PSR) used to evaluate the F&O margin for worst-case scenario loss has been scaled to 6sigma from earlier 3.5sigma, which will make the margin requirement somewhat dynamic as the margin required for naked positions will be higher when market volatility picks up and will be reduced as the volatility in the market subsidies. With the new formula, as it has more memory for volatility, the margin requirements will change slowly.

· The broad notional margins are introduced in derivatives because of option minimum margin and the Extreme Loss Margin (ELM), which accounts for the high margin demand. The ELM is roughly reduced to half as the new margin system comes into being which decreases the notional portion of the margin.

The value of the marginal risk rate is split into 3 groups based on liquidity stated by SEBI in its circular. The regulator revived its guidelines with regard to the margin framework for derivatives in terms of volatility, circulation prices, volatility scan range, calendar spread fees, minimum short option fees, extreme loss margins and combined margins of crystal obligations. Another requirement is to provide highly volatile stocks with an additional amount of margin.

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