Additional margin

In plain language

How it works

A worked example

Additional margin per side = 2% x 5,00,000 = Rs 10,000

Why NISM asks about it

Common exam traps

Check yourself

1. 1.What distinguishes an additional margin from a special margin?

   1. a)Additional margin is levied on both buy and sell sides; special margin is levied on only one side of the open interest
   2. b)Additional margin is levied on select clients; special margin on all clients
   3. c)Additional margin applies only to agri commodities; special margin only to non-agri
   4. d)Additional margin is imposed by SEBI; special margin by the exchange without reference to SEBI
   Show the answer

   Answer: (a) Additional margin is levied on both buy and sell sides; special margin is levied on only one side of the open interest

   "ADDITIONAL MARGIN IS LEVIED ON BOTH SIDES, i.e. BUY AND SELL. A SPECIAL MARGIN IS LEVIED ONLY ON ONE SIDE of the open interest standing in the market — EITHER BUY OR SELL."

   And their purposes differ accordingly: "The purpose of ADDITIONAL MARGIN is mainly TO REDUCE THE MARKET'S OVERHEATING in terms of higher open interests, while the purpose of a SPECIAL MARGIN is TO CORRECT THE MARKET'S OPEN INTEREST AND PRICE MOMENTUM ON ONE SIDE which seems to be affecting market integrity."

   Think of it as the difference between cooling the whole room and opening one particular window. If open interest is simply too large, both sides are asked for more. If the pressure is one-directional — a run-up driven by relentless buying — only that side is squeezed.

   Option (b) describes CONCENTRATION margin, which is the third instrument in this family: "ADDITIONAL AND SPECIAL MARGINS ARE LEVIED ON ALL THE CLIENTS within a commodity, BUT CONCENTRATION MARGINS ARE LEVIED ONLY ON SELECT CLIENTS." It is "an excellent tool to levy margin ONLY ON THOSE CLIENTS WITH CONCENTRATED CONTRACTED OPEN INTEREST vis-à-vis total open interest", judged on time to maturity, liquidity, and the width and depth of the market rather than by any fixed rule.

   Option (d) is contradicted directly: "Existing guidelines mandate that THE REGULATOR'S VIEW SHOULD BE TAKEN BY THE EXCHANGES BEFORE LEVYING OR REVISING ANY KIND OF ADDITIONAL OR SPECIAL MARGIN."

   The four indicators that trigger them: one sided run in future prices · growing divergence of futures and spot prices · significant increase in open interest NOT BACKED BY STOCKS IN WAREHOUSE · client-level concentration of open interest.

2. 2.If a client fails to deliver against a sold position, what may the member do?

   1. a)Nothing — the exchange handles all delivery failures
   2. b)Purchase the commodity from the client's account and debit the client, or square off the client's position provided the client was already intimated separately or through the client agreement
   3. c)Retain the client's entire margin as a penalty without further action
   4. d)Report the client to the FIU and suspend the account permanently
   Show the answer

   Answer: (b) Purchase the commodity from the client's account and debit the client, or square off the client's position provided the client was already intimated separately or through the client agreement

   The condition attached to the second alternative matters. Squaring off without prior intimation would expose the member to a complaint for "SQUARING UP OF POSITIONS WITHOUT CONSENT" — one of the nine grievances the exchange entertains. The intimation may be given at the time or built into the client agreement in advance, but it cannot be dispensed with.

   The related right in the same list: ⚠️ "To HOLD THE COMMODITIES PURCHASED FOR THE CLIENT, WHICH ARE SUPPOSED TO BE DELIVERED TO HIM, FOR ADJUSTING AGAINST RECEIVABLES FROM THE CLIENT IN CASE OF DISPUTE OR PAYMENT DEFAULTS."

   And the preventive rights that come earlier: a member may "NOT DEAL in a transaction if aware about FAILURE IN COMMITMENT BY THE CLIENT IN OTHER DEALS, or there is SHORTFALL IN MARGIN — including NOT TAKING FRESH POSITIONS depending upon the RISK PROFILE OF THE CLIENT, OR UPON CLIENT'S HISTORY OF PAYMENT DEFAULTS/DELAYS", and may "LEVY ADDITIONAL MARGINS from certain clients or certain trades depending upon risk profile."

   Option (a) confuses two layers. The exchange and clearing corporation deal with the member's obligation and levy the delivery default penalty — 4% for agri, 3% for non-agri, plus replacement cost. But between member and client, the member has its own contractual remedies, and it is the member who must make good to the clearing corporation in the first place.

Where this is taught

• Series XVI · Chapter 7: Clearing, Settlement and Risk Management

Related terms

• Open interestThe total number of derivative contracts outstanding and not yet settled in an underlying — counted on one side only, because every long is matched by a short.
• Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
• Concentration marginAn extra margin levied only on the clients whose buy- or sell-side open interest is concentrated relative to total open interest in a commodity or contract, rather than on the whole market.
• Devolvement marginA margin charged equally on buyers and sellers of Options on Futures over the last three days before expiry, so that ITM positions about to become futures already carry futures-level margin.
• Special marginAn extra margin an exchange levies on only one side of the open interest — buy or sell — to correct one-sided price momentum that threatens market integrity; SEBI's view is taken first.
• Physical stocks disclosureThe warehouse stock data an exchange discloses, showing how far open interest is actually backed by goods — low stocks suggest the positions will be squared off rather than delivered.