Subject: Proposal for Adjusting Margin Requirements for Defined Risk Spreads to Better Reflect Actual Risk
To
The Securities and Exchange Board of India (SEBI)
SEBI Bhavan, Plot No. C4-A, ‘G’ Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra
Date:
Respected Sir/Madam,
I hope this letter finds you well. I am writing to highlight a concern regarding the current margining framework for defined risk spreads in the Indian derivatives market, specifically related to the large margin requirements that seem disproportionate to the actual risk exposure.
The Issue at Hand
Currently, margin requirements for trades like defined risk spreads are often substantially higher than the actual risk that traders are exposed to. For example, if an investor is involved in a defined risk spread where the maximum loss is capped at ₹4,000, the margin requirement might be ₹40,000 or more. This is akin to asking an investor to put up ₹5 crores to purchase a ₹1 crore property. Clearly, this doesn’t seem to make much sense from a capital efficiency or risk-alignment perspective.
Why This is Problematic
Disproportionate Capital Commitment: Asking an investor to deposit much more than their actual exposure creates a significant burden, especially for retail investors with limited capital. This reduces their ability to diversify and participate in other opportunities.
Inefficient Use of Capital: The capital efficiency of a trader is compromised when they are required to lock up funds far exceeding the risk they’re taking. For example, if the maximum potential loss is ₹4,000, requiring a margin of ₹40,000 is not aligned with the risk-reward ratio.
Inaccessibility for Small Investors: Retail investors, especially those with smaller portfolios, may find it difficult to participate in the derivatives market due to these high margin requirements, even though their risk exposure is clearly defined and limited.
A Fairer Approach
I kindly propose a reconsideration of the margining framework for defined risk spreads so that the margin requirement more accurately reflects the actual risk involved.
If an investor is taking on a defined risk spread with a maximum loss of ₹4,000, then the margin requirement should ideally be closer to ₹3,500 or ₹7,500 (which is the total value of the spread, excluding the credit received), or a small buffer for operational costs—not ₹40,000. This would align the capital commitment with the risk exposure, encouraging greater participation and capital efficiency in the market.
Additionally, if a trader chooses to take positions on both sides of a spread, there should be no additional margin requirement. As the market cannot expire on both sides unless the short strikes overlap or the width of the spread on either side increases, the margin requirement should not increase for merely holding positions on both sides. The trader’s maximum exposure is still clearly defined and should not be subject to additional margin burdens unless the nature of the spread changes.
Conclusion
To conclude, I respectfully request that SEBI consider adjusting the margin requirements for defined risk spreads to ensure they are in line with the actual risk that traders are taking on. This adjustment would create a more accessible and efficient trading environment for retail investors, promoting market growth without compromising on systemic stability.
Thank you for your time and attention to this matter. I look forward to your response and am happy to engage further in discussions if needed.
Sincerely,
Free Market Freak.
push the word guys we got to get this done enough is enough