History of F&O margin requirements in India

January 15, 2022

Queries around F&O margins are perhaps the ones that are most asked by our customers. We launched our margin calculator in 2013 and have continuously tried to educate users about the nuances of the margin system over the years. Since this is a popular topic, here’s a post on how the margin requirement for F&O has evolved over the years and how we compare to other markets. 

When NSE introduced Nifty F&O in 2000, followed by stock F&O in 2001, it replaced the Badla system in India. Over the last 20+ years, trading volumes in F&O have gone up exponentially. Until 2008, trading was mostly in futures, but it is mostly options today. The interest in options shot up once the minimum contract value for F&O went up from Rs 2L to Rs 5L around Nov 2015, which meant that small traders who didn’t have sufficient margin to trade futures shifted to trading options. STT for options trading reducing from STT on Strike+Premium to only Premium from 2008 also helped.  This trend has only continued after the restriction of intraday leverages on margins in 2020. Today NSE is the largest derivatives exchange in the world.

Why margins?

When you buy options, the risk is limited to the premium paid. But when you trade futures or short options, the risk is technically unlimited. Margins are collected from customers to reduce the risk of counterparty default and ensure that there are no systemic risks due to these defaults on the entire market. 

When SEBI originally introduced F&O, it laid the framework for margin collection for market participants trading these contracts. The upfront margin required to enter contracts with unlimited risk—futures & short options—was called Initial margin. This initial margin is the sum of SPAN and Exposure margins. 

SPAN (Standard Portfolio Analysis of risk) is a popular system developed by CME (Chicago Mercantile Exchange) used to calculate risk and margins for F&O portfolios adopted by many exchanges worldwide. When launched in 2000, the SPAN margin was collected to cover for the worst possible movement in the contract for a single day (called MPOR or minimum Margin Period of Risk). This worst possible scenario is calculated using the Price Scan Range (PSR) of the underlying index or stock. PSR is calculated using the daily volatility of the underlying. Back in 2000, it was set at 3 standard deviations of the daily volatility for index contracts and 3.5 standard deviations for stocks.

Exposure margins are charged over and above SPAN margins to cover for risks that the SPAN margin may not cover. When F&O was introduced in India, this was set to 3% of the contract value for index and 5% (or 1.5 standard deviation, whichever is higher) for stock F&O. 

Short Option Minimum (SOM) is a minimum margin for all strikes of short option contracts that fall beyond the PSR. For instance, if the Nifty spot is at 16000, and if Nifty has a PSR of ~1000 points (covering a 7% movement), all contracts beyond 17000 CE or 15000 PE would be considered risk free under SPAN and no SPAN margin was required. While exposure margin was still charged, that wasn’t considered enough. So, to cover this, an additional minimum short option margin (SOM) of 3% was collected. 

Introduction of penalties for not collecting SPAN – Aug 2011

While SEBI had mandated that the broker provide margins to the clearing corporation on behalf of their customers for all F&O positions, it didn’t mandate that the broker collect these margins from the customer in the first place. In the 2000s, brokers competed by offering trading with margins lower than the required SPAN+Exposure. This was the era of percentage brokerage, where a customer trading with more money meant more revenue to the broker which compensated any funding costs. This system of excessive leverage hurt the industry during the volatility of 2008 with many brokers almost going bust. The capital market ecosystem in India was extremely lucky to have survived that intense volatility without any severe damage. 

To control this risk, SEBI introduced the concept of daily reporting of customer margins and short margin penalty in 2011. If the customer hadn’t parked sufficient SPAN margin for open positions at the end of the day, there would be a penalty called “short margin penalty”. This minimum collection of SPAN reduced the overall risk in the markets significantly. The penalties were as below: 

Amount of short margins Per day penalty %
(< Rs 1 lakh) And (< 10% of applicable margin)  0.5
(≥ Rs 1 lakh)   Or  (≥ 10% of applicable margin) 1.0

Did you know? A key impetus for us starting Zerodha in 2010 was that there were discussions in the markets on SEBI introducing margin reporting and short margin penalty after the market collapse in 2008. We thought we could potentially disrupt pricing if we didn’t have to compete with other brokers by offering high leverage taking much higher risks. This is what led to us launching a flat fee pricing model (of Rs. 20 per executed order in 2010) for the first time in India. 

Penalties for not collecting SPAN & Exposure – June 2018

While collecting SPAN was mandatory for all end of the day positions, exposure margins were optional. In June 2018, SEBI mandated brokerages to start collecting exposure margins on all end of the day positions. This was again to reduce the overall risk in the markets. We had shared details of this change and its impact in this Trading Q&A post.

Change in Margin Period of Risk or MPOR – Dec 2018

The minimum Margin Period of Risk (MPOR) was changed from 1 day to 2 days in Dec 2018. This meant that the worst possible scenario calculation had to now cover for 2 days, which, as you would imagine, resulted in a significant increase in margins. The initial margin requirement went up by almost 40% for many contracts. We had explained this in detail in this Trading Q&A  post

Review of margin framework for equity & F&O – June 2020

While margins to trade F&O were always required, this wasn’t the case with equity or stocks. Margin requirements were made mandatory for trading stocks in June 2020(Margin collection was made compulsory in Jan 2020, penalties were implemented from Sep 2020). Certain changes were made in the way initial margins were calculated in F&O that greatly benefited customers who took hedged positions that reduced their overall risk. A couple of important changes were: 

  1. Increased coverage of risk in SPAN from 3 standard deviations to 6 standard deviations. This caused an increase in SPAN margins which was offset by the reduction in exposure margins by ~40%. Exposure margins are now 2% for index and 3.5% for stock F&O. 
  2. Short Option Minimum(SOM), which went up to 5% for index (7.5% for stock F&O) in Dec 2018 was removed. This meant that low to zero risk portfolios would only have to maintain exposure margins. For instance, for a Nifty credit call spread, margins came down from Rs 1lk to Rs 30k. 

More details on these changes are explained in this Tradingqna post

Introduction of intraday peak margin penalty (Dec 2020)

Until now, the responsibility of the broker to prove that the customer had enough margins for the open position, was on an end of day (EOD) basis. All short margin penalties imposed by the exchanges were based on this EOD position. What this meant was that a broker could potentially allow customers to trade with high leverages intraday without any margin in their accounts, as long as there was no end of the day position. There was a significant intraday risk that brokerage firms were taking and SEBI decided to fix this. 

SEBI introduced the peak margin framework where the clearing corporation takes snapshots of position in customer accounts at 5 random intervals during the trading day. If there isn’t sufficient margin at any time to hold the position, an intraday peak margin penalty is charged. Intraday trading contributes significant turnover to the exchanges and most intraday trades until now had brokers offering some additional leverage or asking for margins lesser than the minimum SPAN+Exposure. Since this regulation could potentially create a huge impact, SEBI gave a period of 9 months to transition. So from Sep 2021, any customer trading F&O even for intraday was required to have a minimum SPAN+Exposure margin in the account. Similarly, for equity, the margin requirement was set at 20%. This post on Tradingqna explains this in detail. 

Issues with peak margin penalties 

While there is no doubt that the introduction of the peak margin penalty has reduced the overall risk in the industry, the way it has been implemented has had some undesired second-order effects that are hurting the trading community. 

  • SPAN+Exposure margins change 5 times during a trading day. The change is based on intraday volatility. If a customer is holding a position from before and if margins go up due to intraday volatility, the account can potentially be short of the minimum SPAN+Exposure required leading to peak margin penalty. A penalty charged without providing enough time to add funds to the account for an existing position is quite harsh. 

This peak margin requirement when margins rapidly increase intraday due to volatility is impossible to comply with. Even if a customer holds 10% additional funds to cover for such unpredictable intraday margin spikes, in reality, the margin requirement can go up to arbitrary levels on volatile days, leading to a penalty. 

  • The last SPAN+Exposure for the day is released after the closing of market hours. If by any chance the margin required goes up from the 4th snapshot to the 5th snapshot, there is no way to notify customers and collect the additional margins towards the close of the trading day. 

While there are other smaller issues with the implementation of intraday peak margin requirements, the above two have serious adverse effects both on brokers and the trading community at large. We have been requesting the exchanges, clearing corporations, and SEBI to find a way to address these. The easiest way would be to consider only SPAN margin requirements while calculating intraday peak margin requirements as the risk for intraday positions is much lower than overnight positions, for which SPAN margin suffices. 

Indian exchanges vs global exchanges

Benchmark  Comments
Margins In India, both SPAN and Exposure margins are charged while globally (CME, ASX, etc) only SPAN margins are collected. Exposure margins are only introduced ad hoc on days with unexpected volatility.
Margin collection frequency Euronext and CME issue intraday margin calls that have to be fulfilled within a given time frame.

In India, peak margins snapshots are at random intervals making it impossible to accurately assess or fulfill margin shortfalls.
Intraday margins CME charges 25-50% of initial margins as intraday margins.

In India, 100% of the initial margins(SPAN +Exposure) is required to be maintained

Timeline 

  • The 2000s- Introduction of F&O in India
  • 2011- Introduction of penalties on SPAN margins
  • 2018- Penalties on SPAN +Exposure
  • 2020- Revamp of margins to help hedged positions
  • 2021- Introduction of peak margins

Best, 

Faisal

Business @ Zerodha

79 comments

  1. Ramesh Babu Somisetty says:

    Hi nithin

    Thanks you so much for covering 20 years of stock market in a single article. Well explained and almost everything is covered.

    Zerodha is always at front place to educate investors about stock markets.

    Take a Bow.

    • Tapan Dubey says:

      We should file PIL against margin penalty of 5%/ day, it’s too much.
      It’s killing retailers slowly….
      Thanks

    • Sanjay says:

      Good to know we are the largest derivatives markets of the World. But does such large derivatives size bring in more risk, speculations, loss to new investors etc. Why US markets dont have such large derivatives

  2. Ranjitha Gadiyar says:

    I had been asking zerodha to show proof of peak margin penalty amount instructed by exchange and so also proof for penalty paid by zerodha to exchange for months now. Zerodha not able to submit document requested which raises trasperancy issues. Do not know when will I get these documents.

  3. Santosh Magar says:

    Hi Nithin !!
    Very good information about history of and Psychology of Margins.
    Thanks

  4. Anilkumar says:

    Like the stock exchanges disseminate the margin % applicable in Cash Market stocks, NSE should also disseminate the F&O stocks margins applicable based on the BoD Span Risk Parameter files. Instead now they expect everyone to download these files, convert in CME’s SPAN software and thereafter get the margin details. Most people use Zerodha’s Margjn Calculator as an easy short cut. This is not to be expected from World’s highest volume generator in F&O segment.

    • Faisal says:

      Anilkumar,
      The exchanges provide the SPAN files to the brokers and it is the brokers who are at the client-facing end who disseminate the margin information to you 🙂

  5. Harish says:

    Despite all of that Indian broking industry is terribly lagging behind in technology, every other retail trader around the world have access to sophisticated trading tools- access to ultra high speed data feed, footprints, price ladders, algorithms etc. Most traders here are at a disavantage…so you should never equate quality with quantity.

  6. Sanjoy Talukdar says:

    Well Written

  7. HIMELAB says:

    Sir, could you please share the initiation process of the contracts, i.e. who buys or sells it for the 1st time when it first hit the exchange, I mean if there is no seller then there wont be any buyers. so, who buys or sells for the very first time and from whom? Thank you

    • Amiya says:

      This things comes part as an opened and pending position and whenevr there is a counter side trader, the order gets executed.
      \

  8. TULSIDAS,NANAKRAM, NATHWANI; says:

    NITHIN TEAMS,THANKS,thanks,

  9. Rupesh Patil says:

    Thank u

  10. Deepika says:

    Thanks for use full information…
    its shows as we are living out of the world. if we need to sell even 50Rs worth of option the margin should we have to pay 100% (1lacks min). for buying just 50Rs… what a jock.

    • Krishna Kumar says:

      The regulator has been on a roll in introducing illogical rules and regulations to bring as much impediments as possible in the way of a trader. Thanks to the peak margin intraday traders are paying millions in peak margin penalty. No where in the world there is a system of arbitrarily changing margins for F&O. Hopefully god gives wisdom to these jokers and the margin issues are fixed. Also the brokers need to raise their voice.

  11. Dixitpatel says:

    great 👍

  12. Birendra Khuntiya says:

    Jharkhand was the most

  13. Amit yadav says:

    Zerodha is good training in stock market

  14. Lakshay Narang says:

    Very good information.
    Well written!!!! 👍👍

  15. Sunny Rawat says:

    The exchanges provide the SPAN files to the brokers and it is the brokers who are at the client-facing end who disseminate the margin information to you 🙂

  16. Bikram ghosh says:

    U have vacancy COMMI_i

  17. R SURESH BABU says:

    Educative and informative and lucid.

  18. Neeraj says:

    Thanks

  19. Sujeet Kumar says:

    Please close my account

    • Shruthi R says:

      Hey Sujeet, we’re sorry to hear that you wish to close your trading and demat account with us. What seems to be the issue?

  20. Ravi Yadav says:

    Hi Nitin Ji
    Very good information about history of stock Market and explained everything .

  21. Arfat wadkar says:

    Zerodha is good training in stock market📈

  22. Pandurang thorat says:

    Zhiroda ने मेरा F&O शूरू करणार चाहीये
    5साली से zhiroda me hu
    Yar
    😭

  23. sandeep kumar says:

    Good information.
    we have to follow global Margin Rolls. not just like what we think, its not a healthy way to be globalize.

  24. Prabhat says:

    Dear Zerodha,
    Your kit app is very good and any person use easily .
    Thank you for good wishes

  25. Koushick ponnusamy says:

    Really super

  26. arun says:

    Meanwhile evolution of Zerodha.
    OTM options buying not allowed as they are market leaders! Unable to take a butterfly from Zerodha. Hence FnO trades not possible in Zerodha for a conservative trader.
    Zerodha is best for people who buy and hold/pledge

  27. shyamkumar says:

    Hi All,

    I’m very much a beginner at the share market. Anyone, could you please help me. How to invest? How to trade?
    My whatsup / Mobile number : +91 – 7411002816

    Thank you

  28. Vishal Jangid says:

    Great Article Faisal

  29. kusum says:

    its good article to define margine rule.
    please feedback to what SEBI profit imapact in this rule.

  30. sharana says:

    all brokers should effort and apply high pressure on SEBI to retain old margin benefit system which helps for economy development of people and nation.Otherwise govt should realaise and analyse margin cancel decesion is favour of economy development or not.If govt not provide margin facility for traders, FII will loot total wealth of india.Foreign brokers who are providing high leavarage margin for traders are favour of economy development.not eadiat economist like india.

  31. Kiran says:

    Nithin ji can you explain about the recent rule of DNC or if any option is not cleared on trading day due to lack of buyers on next day the trader has to go for auction of the future and has to pay the difference and also the penality please explain in detail as this would leave a devasting effect on retail buyers.

  32. Kumar says:

    Nithin ji can you explain about the recent rule of DNC or if any option is not cleared on trading day due to lack of buyers on next day the trader has to go for auction of the future and has to pay the difference and also the penality please explain in detail as this would leave a devasting effect on retail buyers.

  33. Shashikant M says:

    Can we sell F&O stocks on T1 holding on 3rd from buy e.g. Buy on 17.01.22 and wish to sell on 19.01.2022, can we sell without any penalties please?

  34. Shiney Jacob says:

    Pls help me in trading [email protected] platform.
    The article is very informative

  35. Manoj Yadav says:

    Dear Nithin sir,

    I am a beginner can it’s explain in others ways.

  36. ashish says:

    good knowledge sharing article. sir, i request you to add manually chart saving button in zerodha kite chart IQ as most of the time charts don’t save trandline and other drawing. thanks

    • Shruthi R says:

      Hey Ashish, drawings on ChartIQ are saved automatically, once you add a drawing to a scrip, they will be available the next time you open the chart for that scrip. More here.

  37. Viwekanand says:

    Thanks for great content regarding F&O. My all queries about Options completely fufilled.
    Thanks again

  38. Rajendra kumar chowdhary says:

    Open to F AND O PLEASE HELP

  39. Kalpana Kothari says:

    I don’t understand ,i used nearly 40000 rs margin in hedge position in nifty ( one ce buy & one ce sell ), still balance is 49000 ,why I am getting msg and email for adding fund .
    Total balance is 89000.
    should I use intraday order ?

    • Faisal says:

      Kalpana,

      I’m guessing here that you have placed a sell order for your buy CE position which the system assumes that the hedge is broken and margin alerts are sent out. As long as both the buy CE position remains, you won’t be charged margin penalty. You can use GTT to avoid this.
      You can create a ticket on support.zerodha.com if this doesn’t answer your query.

  40. Hitesh Rajgor says:

    Thank you

  41. Girish says:

    better to trade in cash only , no target .

  42. K Balakrishnan says:

    When you buy options, the risk is limited to the premium paid. This statement in the beginning of para “WHY MARGINS” is incorrect. Such incorrect information only leads to retailers facing situation of recent HINDALCO put option buyer. There is need for your team to do proper research before putting up the article in the portal. Hope the article is suitably changed to include risk in buying options also.

  43. Arvind kumar says:

    Better to tread in cash only.

  44. K Ghosh says:

    I think increase in margins whether arbitrary or logical is associated to create a bull market in the short term.

  45. MJ says:

    good post

  46. Babasaheb Jalindar Wadekar says:

    Very Nice Inforamtion

  47. Karuvanathi Perumalla says:

    The post is educative sir. In one way it is good that margins are increased. At least ppl having money will not manipulate using pump and dump. In spite of all problems for option sellers, there is a new problem i.e. oi restriction. Zerodha has wonderful business ethics sir, but ppl are forced to leave platform due to inability to take positions. Nithin sir is really a visionary in this business.

    • Faisal says:

      Karuvanathi,

      Yes, there are restrictions on naked option buy but you can buy options if you have a short options positions without any issues.

  48. RD Patel says:

    Thanks Nithin for giving all the facts clearly.

    Charging full margins for intraday positions which have much lower risk as compared to overnight positions is unfair against traders. Globally they have sensible rules, only Indian beaurocrats love to show their super intelligence by making such unfair rules thereby killing profitability of retail traders. Currently no powerful people / lobbies in India are supporting the cause of retail traders.

    Eventually the wheel will turn full circle, and the same retail trader will have his fair chance to earn again. The question is how soon will that be.. I request all brokers in India to pursue this matter with the Govt along with representatives of retail traders. SEBI has turned deaf ear so far, hence this needs to be taken to higher levels in the Govt.

  49. Parth Pandey says:

    If you really know how the system works, I’m sure you must be aware of the broker-wise OI restrictions that the SEBI imposes on options?
    Zd doesn’t willingly choose not to offer long term options to its clients, unfortunately they don’t really have a choice on this one.

    P.S- There’s a saying in the market, its called the Dunning Krueger effect, and it can be summarised by “a little knowledge is a dangerous thing”

    • Inverse vix Trader says:

      Are you a zerodha employee or a True beacon employee…

      I generally never comment but I got a popup so though about commenting.

      There are lot of sayings in the market you’ll go deaf listening to it.

      I work with something called Anumana Pramana.. Try to research and understand on that

      Too much knowledge can be bad sometimes.

      Try to read and understand our ancient texts rather than blindly following westerners.

      You should understand what VIX is…. You clearly dont..

      • Inverse vix Trader says:

        Also… What you have said versus what the kamath brothers have been commenting in the news are at odds…

        If they read this comment, they will understand what I am saying.

  50. Karthi says:

    Faisal, hi..
    Can you throw some light on the magnitude of this intra day peak margin penalty?
    Eversince it was implemented (4 full months have gone by), how many instances and how much value of penalty was imposed on Zerodha customers?
    This set of numbers will give some sense on whether the regulator will heed to the industry representations.

    Thank You.

  51. gurpreet singh says:

    why my tickerape strategy vanished by you i hav paid u r going back ustomer leaving

  52. Dilip says:

    Peak margin penalties: Does a client even gets to know that on that day he/she was penalized for peak margin? If yes what exactly was charged? And also on peak margin penalties STT is also charged?

    • Faisal says:

      Dilip,
      You can find the total margin required and total margin reported in the margin statement sent to you by email(or downloadable on console.zerodha.com).
      The exchange sends us the margin penalty after 7 days and is charged to you and you can see it on your ledger.

      No, STT is applicable only on trades done, not on penalties. But GST of 18% is applied on the penalty amount.

  53. BHASKAR says:

    traders should be given voting rights & than these decesiions should be taken & moreover sebi is derering 50% margin from 2 times at the expense of 6 months . even if given one vote for demat account or per trading account would atleast mean people asking this instead of some stupid professionals in sebi taking decesiion unanimously . coz its not their money why would they know the pain.

  54. Sanjay says:

    So what would be the margin required to hold 100 lots of options of reliance on expiry day

    • Shubham says:

      Hey Sanjay, this depends on the type of position you’re holding, long or short. If you’re holding Long Option and if it is ITM, the margin requirement will be 50% of the contract value. If it is OTM, there will not be any additional margin requirement. If you’re holding a Short Option position, the margin requirement on expiry day will be 40% of the contract value or SPAN + Exposure margin (whichever is higher), irrespective of the position being ITM or OTM. You can check out more details here.

  55. Karthik says:

    Hi,
    Is the 50:50 margin rule implemented from May 2, 2022 applicable only for Positional (overnight/carry forward) trades or does it apply for Intraday trades too?
    Need clarity on this

    • Shubham says:

      Hey Karthik, for you as a Zerodha user, things remain the same. For intraday trades, you can use 100% collateral margin. For overnight positions, you will have to maintain a minimum 50% margin in cash and the remaining 50% in collateral margin. Just like it was earlier.

  56. Vishal says:

    https://support.zerodha.com/category/trading-and-markets/margin-reporting-and-margin-penalty/articles/margin-shortfall-instances

    What are margins and how can margin shortfall occur?

    This is with reference to the explanation given about possibility of margin shortfall in F&O at the above link about peak margin requirement.

    In the F&O example, if the individual buys one lot of NIFTY futures, he has to have that 1.08 lakhs. Now if he is buying the put option, his margin requirement reduces for both trades combined to 44.65k only.

    But it is untrue that you only need 44.64k to enter both trades like it is mentioned in the example.

    The margin requirement is based on what trade you enter first. You will not be able to buy a future position with 44.64k, unless you first buy a put option and then buy a future position.

    So the same goes with the selling also, if you sell put first, you will be margin short, but if you sell the future first, you don’t have to worry about the short margin.

    The regulators don’t want to give free hands to the TMs so TMs let their favorite clients place buy future order first and then buy or not buy a put position for 44.64k margin only, and that is why they have come up with this upfront collection of peak margin regulations.

    But if you are telling me that the regulators says that you entered the trade with 44.64k by buying put first and than bought the future, but while exiting, you exited the put first, become margin short for few minutes (worst case, until the next snapshot was taken before you could exit the future position also), and exited you future position thereafter, all these during the same day, yet you need to deposit the difference of Rs. 1.08 lakhs and 44.64 to avoid penalty, that is not wise/practical/helpful/logical in anyways, and I think that is not what the regulator has suggested also. Please correct me if I misunderstood.

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