SPAN is the minimum margin that exchanges ask for derivative positions. Stock exchanges, in addition to SPAN ask for exposure margin to reduce the systemic risk of client defaults. So they block this additional exposure margin, so that in case of MTM losses, clients don’t drop below the SPAN margin requirements immediately.
SPAN margin is paid when you initiate trading, whereas, Exposure margin is paid to safeguard a broker’s liability that could originate because of market volatility.
Also known as the additional margin, it is lower for brokers who fulfill their obligations on the trading day itself as compared to the ones who complete it the next day.
SPAN margin is calculated by taking the volatility and the risk of the underlying asset into consideration.
Exposure margin, on the other hand, is calculated in an ad hoc manner, based on the value of the undertaken risk.
SPAN margin changes as per the volatility of the underlying security. Exposure margin remains the same as it is charged to provide an additional safety against risk.
Exposure margin for a Futures contract is calculated at 3% of the contract’s total value.
For example, if the total value of a Futures contract is ₹200,000, its Exposure margin would be calculated as 3% of 200,000, which comes to ₹6,000.
Exposure margin for Options, Stocks, and other similar derivatives is calculated at either 5% or at 1.5 X SD, whichever comes out to be higher.
Exposure margins apply to the Futures and Options contracts trading at NSE and while trading in commodity derivatives at MCX.
Total Margin is calculated as SPAN margin + Exposure margin.
Day trading is less risky than the carry forward or overnight trades. Therefore, intraday trades are charged less in terms of percentage, by the brokers, than overnight trades or carry forward trades.
What will happen if i loss 3% of the contracts total value? Will the broker square off my position If i loss 3% or more?
Let’s assume your contract value is 9 lacs and the NRML margin required to carry this position is 1.15 lacs(Span 70k and Exposure 45k).
If you lose 3% of contract value, then you lose 27k. If you don’t have free cash in your account, then this amount will be subtracted from your exposure margin and your account will be in a margin debit for which you will be charged an interest. You can only take a loss upto your exposure margin(45k in this case). If the loss enters your span margin and you don’t add funds before that, then your position will be squared off.
Thanks…How much interest will i have to pay if the amount is subtracted from exposure margin?
@nithin why cant this stupid exposure margin be removed? I dont think any of the global stock exchanges have this stupid margin? SPAN should be enough, it is unnecessarily eating away our margin. As nifty rises in value, this margin will keep rising as it is a % of nifty50 value. why dont you guys take it up with SEBI via ANMI?
@nithin its a win win for all, exchanges, SEBI, brokers, traders to get rid of this margin, more revenue for all . trading is a risky game. if one is not ready, dont get into it. we all traders understand this; risk = profit.
cant we take it up again with the new SEBI chief.
It isn’t really a win-win for all, the risk goes up significantly. Check this post.
@nithin am sure if a developed country like US which has 60% of world stock market cap has a proven system of handling risk; our exchange can replicate it. its just that we still have a communist mindset prior to 90s.
In the US, the client risk is much lesser than in India. A defaulting customer has to file for bankruptcy if unable to return any losses, in India a customer can just go open another broking account. So that has to be first covered before the capital market can be more aggressive in terms of risk management. I think it will happen, but it will take time.
Yes, but everyone these days want instant change. From 0 to 100 in an instant.