SPAN Margin
SPAN system measures the margin to be provided for different individuals and their whole portfolios.
BY RATTANDEEP SINGH | 2 Mins Read
In the stock market we are required
to pay a margin whenever we purchase any security. This margin is blocked by
the broker or the exchange from our trading accounts. Margins allow investors
to use leverage while performing intraday trades as they allow the traders to trade
any security without paying the full amount that would have been paid otherwise
. These margins usually provide a buffer. In case the investor suffers any loss
he is asked to pay for that loss bit because of margins , the losses are
deducted from the margin that has been already collected from the investor.
In India we have two types of
margin, SPAN margin and the exposure margin. SPAN margin is the primary margin
in place while the exposure margin is secondary and over and above the SPAN
margin.
SPAN margin stands for standardized
portfolio analysis of risk. It is a leading system that has been adopted by
leading exchanges all around the globe. It is based on the concept of VaR
margin. VaR refers to the value at risk which means the maximum value that can
be eroded in a single day. SPAN is a very effective system in itself because it
has covered about 99% of the cases in which loss is being incurred. It is based
in a very advanced algorithm which measures the maximum value that can be
eroded in a single day on a portfolio to portfolio basis i.e. SPAN system
measures the margin to be provided for different individuals and their whole
portfolios. It mainly takes into account the volatility in that particular security
while calculating the margin requirement.
SPAN should mandatorily be
provided in case of overnight trades in order to maintain the the position due
to which it is sometimes referred to as maintenance margin or else the
exchanges may penalise the trader.
In the news
Recently SEBI has been
considering a revamp in its system of derivatives trading in order to lower the
cost of derivatives trading. Now it is being expected that SEBI may do away
with the exposure margin and only SPAN system will continue . This is
significant because earlier traders used to pay SPAN on the whole portfolio
along with exposure margins on individual trade. Because of this system retail
investors were not able to play hedged option strategies as the exposure margin
requirement would make the strategies unviable but now the margin requirements
will reduce by about 30-35% for hedged strategies while it may reduce margin
for other trades by 10-15%. This will be very beneficial as it will allow for
an increase in trading volume and provide increased liquidity and turnover.
Moreover Foreign investors usually didn’t trade Indian stock options onshore
due to high margin requirement , instead moving on to trade the same options at
Singapore . With this proposed move more foreign investors will trade in India
which will be even more beneficial in India becoming a bigger and more
significant market on the global level.