The National Stock Exchange (NSE) announced on April 16 that it plans to implement an additional exposure margin requirement on select Futures & Options (F&O) stocks.

This new regulatory framework is set to take effect from April 26, 2024, aligning precisely with the post-expiry phase of the April 2024 F&O contracts.

This strategic timing ensures that the market transitions smoothly into the new margin structure without disrupting ongoing contract settlements.

A detailed circular released by the NSE outlined that an additional exposure margin of 15 per cent will be applied within the equity derivatives segment.

This particular margin requirement will be imposed on securities where the concentration of positions by the top 10 clients exceeds 20 per cent of the Market Wide Position Limit (MWPL).

The MWPL represents the total allowable open interest (OI) on F&O contracts for any specific underlying stock, a critical regulatory threshold intended to prevent excessive speculative activity and maintain market stability.

The concept of exposure margin is crucial in risk management in derivatives trading.

It is collected in addition to either the span margin or the Value at Risk (VaR) margin, which traders must initially meet to open a position.

The span margin covers potential losses for a set period, while the VaR margin accounts for the potential maximum loss over a specified period under normal market conditions.

The additional exposure margin, therefore, acts as a further financial buffer against potential losses that could arise from volatile and unpredictable market movements.

Furthermore, the circular specified that in cases where an additional surveillance margin is already being applied, the higher of the two margins—either the newly stated additional exposure margin or the existing surveillance margin—will be enforced.

This approach ensures that the highest level of risk mitigation is consistently maintained across all relevant securities.

The selection of stocks subject to this additional margin requirement will be determined based on a rolling data review spanning three months.

This list will be updated and reviewed monthly to adapt to any changes in the market dynamics, thereby ensuring that the imposition of additional margins is both timely and reflective of current market conditions.

This dynamic approach allows NSE to effectively manage systemic risks and enhance the overall integrity of the financial markets it oversees.