Concentration margin
Also written Concentration margins
An 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.
In plain language
Additional and special margins are blunt: they land on every client holding the relevant side of a contract, whether that client holds one lot or a tenth of the market.
Concentration margin is the precise instrument. It is charged only on the clients whose positions are concentrated — large in relation to the total open interest in that commodity or contract. The workbook calls it "an excellent tool" for exactly that reason: it lets the exchange pick and choose the positions that carry the risk.
The risk being managed is the one position limits also address: a single client or a group acting in concert holding enough of a contract to move it.
How it works
Scope compared (Chapter 7, section 7.11.4):
| Margin | Charged to |
|---|---|
| Additional | All clients, both sides |
| Special | All clients, one side |
| Concentration | Select clients with concentrated open interest on the buy or sell side |
No fixed rule. There is no rule that determines whether a client's position falls within concentration margins. Exchanges are expected to consider:
- the time to maturity of the contract;
- the liquidity in the contract;
- the width and depth of the market.
Where else it appears.
- Client-level concentration of open interest is also one of the triggers for additional and special margins.
- Commodity index options: the clearing corporation imposes concentration margin on sellers alongside SOMM, initial, ELM and pre-expiry margins (Chapter 2, section 2.6).
- Alternative Risk Management Framework: clearing corporations may levy concentration margins at their discretion (section 7.11.7).
- Futures positions carry "additional / ad-hoc / concentration margins", which is why ITM options devolving into futures attract devolvement margin first.
Related limit. Client-level and member-level position limits exist "to avoid concentration risk and prevent market manipulation" (section 7.10.6). Position limits cap how large a position can get; concentration margin makes a large position expensive to keep.
A worked example
Open interest in a near-month jeera futures contract stands at 2,000 lots on the buy side. Four clients hold long positions (figures illustrative):
| Client | Long lots | Share of buy-side OI |
|---|---|---|
| P | 520 | 26% |
| Q | 60 | 3% |
| R | 40 | 2% |
| S | 20 | 1% |
The contract is two weeks from expiry and liquidity is thin. Weighing time to maturity, liquidity and market depth, the exchange decides that P's position is concentrated and levies a concentration margin of 3 per cent (illustrative) on P alone.
Take a contract value of Rs 3,00,000 per lot (illustrative):
P's position value = 520 x 3,00,000 = Rs 15,60,00,000
Concentration margin = 3% x 15,60,00,000 = Rs 46,80,000
Q, R and S pay nothing extra. Had the exchange used a special margin on the long side instead, all four would have paid 3 per cent — Rs 10,80,000 falling on Q, R and S, whose 120 lots between them pose no concentration risk at all.
The outcome is also the incentive: P can cut the margin by cutting the position.
Why NISM asks about it
Chapter 7, section 7.11.1, names concentration margin among the seven futures margins, and section 7.11.4 (Additional / Special Margin and Concentration margin) defines it and lists the factors exchanges weigh. Section 7.10.6 ties position limits to concentration risk, section 7.11.7 lists it among discretionary margins under the Alternative Risk Management Framework, and Chapter 2, section 2.6, lists it for index options. Expect "which margin is levied only on select clients?"
Common exam traps
- Select clients only. Additional and special margins apply to all clients in the commodity; concentration margin does not.
- There is no numeric rule for when a position is concentrated. The workbook gives factors — time to maturity, liquidity, width and depth — not a threshold.
- Concentration is measured against total open interest in that commodity or contract, on the buy or sell side.
- Client-level concentration is also a trigger for additional and special margins — the same symptom can be treated market-wide or client by client.
- Concentration margin is not a position limit. Limits cap size; the margin prices it.
- In index options it is charged to sellers, along with the other margins; buyers pay premium.
Check yourself
1.What distinguishes an additional margin from a special margin?
- a)Additional margin is levied on both buy and sell sides; special margin is levied on only one side of the open interest
- b)Additional margin is levied on select clients; special margin on all clients
- c)Additional margin applies only to agri commodities; special margin only to non-agri
- 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.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Additional marginAn extra exchange margin levied on both the buy and sell side of a commodity contract to cool an overheated market; separately, a margin a broker may impose on risky clients or trades.
- 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.
- 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.