Explained: Why SEBI postponed F&O margin rules and what happens now

The Securities and Exchange Board of India has deferred the implementation of the new 50% cash-margin rules for the futures and options (F&O) segment to February 28, 2022.

This effectively gives F&O traders three more months beyond the December 1 deadline that was earlier set by the capital markets regulator. 

Why did the regulator defer the implementation of the new margin rules?

In a circular, SEBI cited investor interest, and market regulation and development as reasons for the decision to defer the new rules.

What do the existing rules allow?

The existing rules allow investors to cover their margins entirely with their securities. But as per the new rules, they will need to keep 50% of the value in cash in their account as margins to trade in these segments.

But what exactly is margin?

Margin is essentially a facility that traders use to buy shares they cannot yet afford. They basically pay a part of the money to buy those shares with a marginal amount of the total value. The remainder of the money has to be paid in two days’ time. 

How did brokers react to the deferment?

According to a report by The Hindu Business Line newspaper, brokers said the deferment is likely to create positive sentiment in markets since the rule would have led to many retail investors trimming their derivative trades as the margin requirement would have witnessed a steep hike.

The report said that following the SEBI order, brokers had already started collecting 50% cash margin from derivative traders even though the circular was to come into effect from December 1.

“Cash margins had started putting pressure on brokers for additional cash margin to reduce their risk. SEBI had also stipulated that any excess margin of one client cannot be used for another,” it added. 

What will happen now, in effect, at least till the end of February?

Brokers will now be able to accept shares as margin instead of cash, which is the preferred mode by the retail segment traders. 

But why do retail investors matter so much?

Retail investors matter because in the derivative market they dominate as they hold significantly higher positions in the F&O segment as compared to foreign institutional traders. 

According to the news report cited earlier, at present, retail investors hold 69% of the overall index long calls and 67% index short call options as well as 60% and 71% of index long put and index short put options positions, respectively.

Retail investors also hold 55% of index long futures and 45% of index short positions; and 54% of stock futures long.