Change in extreme loss margin likely to have outsized effect

A seemingly innocuous change to strengthen the index derivatives framework may have a largerthan-anticipated impact on option trading volumes when it is applied on Thursday for the first time at the expiry of the weekly Nifty options contracts, market experts said.

- Ram Sahgal

This new measure increases by two percentage points the extreme loss margin (ELM) on the expiry day of index options on sellers, effectively increasing the margin to trade to 14% from 12% on that day. ELM is applied to cover risks beyond those envisaged by the standardized portfolio analysis of risk (SPAN) margin, which covers 99.9% of loss scenarios.

"The thinking initially was that the ELM increase would not have as significant an impact as compared to some of the other directives," said Ashish Nanda, president and head of digital business at Kotak Securities. "However, it so seems that those selling option contracts in index options on expiry day will see a reasonable rise in margins to trade."

Thanks to this new measure, quite a few clients received alerts from brokers on Tuesday night and Wednesday that they had margin shortfalls in their trading accounts, which needed to be topped up by Thursday, to enable them to hold on to their trades.