SEBI has revised exposure margin requirements for exchange traded equity derivatives. The regulator, based on market feed back, has decided that the exposure margin shall be in excess of five per cent or 1.5 times, which ever is higher. The earlier exposure margin requirement was 10 per cent or 1.5 times the standard deviation of daily logarithmic returns of the stock price. This circular shall come into force from July 15.

With this revision, participation by players is expected to go up especially those who write options and those who keep open positions in stock futures.

Option writers are required to bring in initial margin while writing the option and assignment margin whenever an option written is exercised by the option holder and hence assigned to the writer.

For futures, exposure margin is collected in addition to initial margin.

Exposure margin on futures is calculated on the lognormal returns on the underlying for the six months and this applied to the notional value of the outstanding futures position i.e. higher of 5 per cent or 1.5 times standard deviation.

Standard deviation measures the volatility or the rate at which price of the underlying fluctuates over a period of time.

The higher the standard deviation, the higher is the volatility, and the higher also would be the exposure margin for such underlying asset classes.

Circular No. DNPD/3/2010, dated 7-7-2010

This is in modification of SEBI Circular No. SEBI/DNPD/CIR-41/2008 dated October 15, 2008 which specified that the exposure margin shall be higher of 10% or 1.5 times the standard deviation (of daily logarithmic returns of the stock price) of the notional value of the gross open position in single stock futures and gross short open position in stock options in a particular underlying.

2. Based on the feedback received from market participants, it has now been decided that the said exposure margin shall be higher of 5% or 1.5 times the standard deviation (of daily logarithmic returns of the stock price).

3. This Circular is being issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

4. This circular shall come into force from July 15, 2010.

5. This circular issues with the approval of the competent authority.

6. This Circular is available on SEBI website at www.sebi.gov.in., under the category “Derivatives- Circulars”.