Under the proposal, the benefit of offsetting positions across different expiries will not be available on the day of expiry for singlestock derivative contracts expiring that day.
The review follows feedback from market participants flagging potential risks arising from calendar-spread benefits on expiry days for single-stock contracts. A calendar spread is when a trader holds the same stock’s derivatives with two different expiry dates, which lowers margin because the positions offset each other. The risk appears on expiry day when the near-month contract expires and the hedge no longer exists. This leaves the trader exposed to one-way moves on the remaining position.
“It is clarified that the existing margin calculations for calendar-spread positions shall remain unchanged for calendar-spread positions involving all expiries other than the contracts expiring on a given day,” Sebi said in a circular. The new rule will take effect three months from the date of the circular.
Currently, for index derivatives, calendar-spread benefits are already unavailable on the day of expiry for contracts maturing that day.
Sebi said the proposal would align the treatment of calendar spreads in single-stock derivatives with that of index derivatives and give trading members sufficient time either to bring in additional margin on expiry day or roll over positions.
“In the absence of such formulation, there remains a risk of sudden increase in margin on the day following expiry of one leg of the calendar-spread position, with limited recourse available to trading members in case of margin shortfall or an open leg showing significant adverse price movement,” it added.
