Exposure margin
A derivatives-segment margin charged as a percentage of the notional value of an open position, on top of initial margin; on options it is collected only from sellers.
In plain language
When you take a futures or options position, the clearing corporation wants money up front in case you default. In the derivatives segment, the workbook names two kinds of margin collected on futures:
- Initial margin, worked out by a formula that estimates the risk to the open position over a 2-day horizon.
- Exposure margin, which is simpler: a percentage of the notional value of the open position.
Notional value is the full value of what the contract controls — the number of shares or index units multiplied by the price — not the small amount of margin you put down. So exposure margin grows in step with the size of the position, however calm or volatile the underlying looks that day.
How it works
Futures. Both initial and exposure margins are payable in advance by clearing members before they enter into trading positions. Clients pay margins to trading members, trading members to clearing members, and clearing members to the clearing corporation. Not paying attracts penalties — suspension of the trading facility, disciplinary action, or closing out of open positions.
Options use the same system, with differences the workbook lists:
| Margin | Options treatment |
|---|---|
| Initial margin | Levied on the premium value of open option positions |
| Exposure margin | Levied on the notional contract value (value of the underlying the option represents) — only on short option positions |
| Premium margin | Premium due to the clearing corporation, levied till premium pay-in is complete |
| Assignment margin | For the final settlement obligation, levied till exercise pay-in is complete |
Why sellers only: an option buyer's worst case is the premium already paid; the writer carries the open-ended obligation.
Clearing members send a daily report to the clearing corporation of margins due and collected, and SEBI has laid down a mechanism to verify upfront collection of margins from clients.
The formula
Notional value = Contract quantity × Price of the underlying
Exposure margin = Exposure margin rate × Notional value
The workbook does not give a rate; the rate in the example below is an assumption.
A worked example
Illustrative: assume an exposure margin rate of 3 per cent and one lot of 500 shares of a stock trading at Rs 1,200.
Notional value = 500 × Rs 1,200 = Rs 6,00,000
| Position | Initial margin basis | Exposure margin |
|---|---|---|
| Long futures (buyer) | 2-day risk formula | 3% × 6,00,000 = Rs 18,000 |
| Short futures (seller) | 2-day risk formula | Rs 18,000 |
| Long call, premium Rs 40 | Premium value 500 × 40 = Rs 20,000 | Nil — not a short position |
| Short call, premium Rs 40 | Premium value basis | 3% × 6,00,000 = Rs 18,000 |
Now suppose the price rises to Rs 1,300 and the positions stay open:
New notional = 500 × Rs 1,300 = Rs 6,50,000
Exposure margin = 3% × 6,50,000 = Rs 19,500
The requirement rose by Rs 1,500 because the notional value rose — the rate did not change. Note also the contrast between the two option rows: the call buyer, who controls the same Rs 6 lakh of stock, pays no exposure margin at all.
Why NISM asks about it
Chapter 6 (Derivative Markets), section 6.6.2 "Margins", names initial and exposure margin as the two futures margins and then sets out how options differ, including that exposure margin is collected only on short option positions. Contrast it with Chapter 4 (Secondary Markets), where the cash-segment margins are VaR, Extreme Loss and MTM. Expect "which two margins are collected in the futures segment?", "exposure margin is computed on...?" (notional value) and "on options, exposure margin is collected from...?" (sellers).
Common exam traps
- Exposure margin is on notional value; option initial margin is on premium value. Swapping the two bases is the classic error.
- Options: sellers only. A long option position pays no exposure margin.
- Futures: both sides. Buyer and seller of a future both pay initial and exposure margin.
- Payable in advance, before the position is entered — not at the end of the day.
- Exposure margin is a derivatives-segment margin. The cash segment's list is VaR margin, Extreme Loss Margin and MTM margin; do not mix the two lists.
- Initial margin's horizon is 2 days in the workbook's derivatives chapter.
Check yourself
1.In options, the exposure margin is collected from:
- a)Both option buyers and option sellers
- b)Only short option positions, that is, sellers
- c)Only long option positions, that is, buyers
- d)Neither — options attract no exposure margin
Show the answer
Answer: (b) Only short option positions, that is, sellers
The exposure margin is levied on notional contract value computed in terms of value of underlying representing the option position. Exposure margin is collected only on short option positions (sellers).
The logic follows the risk. An option buyer has already paid his premium and cannot lose more; the option writer has the obligation in the contract and his exposure moves with the underlying, which is what the notional-value margin is sized against.
Contrast the initial margin, which for options is levied on the premium value of open option positions, while in futures it is collected using a formula that estimates the risk to an open position over a 2-day horizon.
Options also attract two margins that futures do not: Premium Margin means premium amount due to be paid to the Clearing Corporation towards premium settlement, at the client level... levied till the completion of pay-in towards the premium settlement, and assignment margin is collected for the final settlement obligation of the option... levied till the completion of pay-in towards the exercise settlement.
2.In the futures segment, how are the initial margin and the exposure margin determined?
- a)Initial margin is a percentage of notional value; exposure margin is estimated by a formula over a 2-day horizon
- b)Initial margin is estimated by a formula for the risk to an open position over a 2-day horizon; exposure margin is a percentage of the notional value of the open position
- c)Both are levied on the premium value of open positions
- d)Both are collected at the end of the day, after the trading positions are taken
Show the answer
Answer: (b) Initial margin is estimated by a formula for the risk to an open position over a 2-day horizon; exposure margin is a percentage of the notional value of the open position
In the futures market segment, two kinds of margin are collected: Initial margin and Exposure margin. Initial margin is collected using a formula that estimates the risk to an open position over a 2-day horizon. Exposure margin is collected as a percentage of the notional value of an open position.
Option A swaps the two definitions — the most common way this is tested.
Option C describes options, not futures: for options, the initial margins are levied on the premium value of open option positions.
Option D gets the timing wrong: both initial and exposure margins are payable in advance by clearing members, before they enter into trading positions.
If margin is not paid, the consequences are suspension of trading facility, disciplinary action, or closing out of open positions. Margins flow up the chain: clients pay margins on their positions to trading members, and trading members to clearing members, who in turn pay the margins to the clearing corporation.
Where this is taught
- Series VIII · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
- Series XII · Chapter 6: Derivative Marketsintroduced here
Related terms
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
- Value at Risk (VaR) marginThe cash-market margin set as a multiple of a stock's volatility and expressed as a percentage of its price, so more volatile shares need a bigger upfront deposit; rates update at least five times a day.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Assignment marginA margin collected on an option position for its final settlement obligation, on top of the initial, exposure and premium margins, levied until the pay-in towards exercise settlement is complete.
- MarginThe money a buyer or seller must deposit before a trade is allowed to stand, so that the clearing corporation is covered if they fail to bring in funds or to deliver securities.
- 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.
- Premium marginA margin charged at client level on option buyers equal to the premium they owe the clearing corporation, levied until the premium settlement pay-in is complete.
- Peak marginThe highest intraday margin requirement of a client, measured from at least four clearing corporation snapshots a day; brokers are penalised if collected margin falls short of it.