Special margin
Also written Special margins
An 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.
In plain language
Margins are not only a buffer against default. The workbook is explicit that they are also a tool for curbing excessive speculation.
A special margin is the targeted version of that tool. When a contract shows a one-sided run — prices or open interest building relentlessly on the buy side, say — the exchange can raise the cost of holding that side only.
Its sibling, additional margin, is charged on both sides. The difference is the whole point: additional margin cools an overheated market generally; special margin leans against the side that seems to be distorting it.
How it works
Triggers (the same indicators for special and additional margin — Chapter 7, section 7.11.4):
- a one-sided run in futures prices, up or down;
- growing divergence between futures and spot prices;
- a significant rise in open interest not backed by stocks in warehouses, particularly in the near month;
- client-level concentration of open interest on the buy or sell side.
Scope.
| Margin | Levied on | Purpose |
|---|---|---|
| Special | One side — buy or sell | Correct one-sided open interest and price momentum affecting market integrity |
| Additional | Both sides | Reduce overheating from high open interest |
| Concentration | Select clients with concentrated positions | Target concentration without penalising everyone |
Special and additional margins apply to all clients within a commodity (on the relevant side); concentration margin applies only to selected clients.
Regulator first. Existing guidelines require exchanges to take the regulator's view before levying or revising any additional or special margin.
Reading the market. The workbook points to the order book as the indicator of whether momentum comes from volatility in the underlying or from excessive buying or selling in one contract.
A worked example
The workbook's gold example. A trader buys one gold June futures contract of 1 kg at Rs 45,000 per 10 g.
Contract value = 45,000 x 100 = Rs 45,00,000
Initial margin plus minimum ELM, say 5% = Rs 2,25,000
Gold then shows very high volatility and open interest builds sharply on the buy side. The exchange, after taking SEBI's view, imposes an extra 1 per cent.
1% x 45,00,000 = Rs 45,000
As a special margin on the buy side:
| Party | Extra margin |
|---|---|
| This buyer | Rs 45,000 |
| His counterparty seller | nil |
As an additional margin instead:
| Party | Extra margin |
|---|---|
| Buyer | Rs 45,000 |
| Seller | Rs 45,000 |
The special margin raises the buyer's blocked capital from Rs 2,25,000 to Rs 2,70,000 — 20 per cent more — for exactly the same position, while leaving the sell side untouched. That asymmetry is what discourages further one-sided build-up.
Why NISM asks about it
Chapter 7, section 7.11.1, lists special/additional margin among the seven futures margins; section 7.11.4 (Additional / Special Margin and Concentration margin) defines it, gives the triggers and the regulator-consultation rule; section 7.11.5 contains the Rs 45,000 gold example. Section 7.11.7 lets clearing corporations levy special margins at their discretion when the Alternative Risk Management Framework is active. Expect a question on which margin is one-sided.
Common exam traps
- Special = one side; additional = both sides. This is the question.
- Concentration margin is for select clients; special and additional apply to all clients in the commodity.
- The regulator's view is taken before levying or revising additional or special margin.
- Open interest not backed by warehouse stocks is a trigger — especially in the near month.
- The workbook uses the phrase loosely in its example, calling the 1 per cent "a special margin" and then explaining it could be charged as either additional or special. The definitions in section 7.11.4 decide which is which.
- It sits on top of initial margin and ELM, not in place of them.
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
- 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.
- 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.
- 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.
- Tender period marginAn extra margin charged at client level on all open positions once a contract enters its tender or delivery period — the higher of 20% of contract value, or 3% plus a five-day 99% VaR of spot prices.
- Daily Price LimitThe band around the previous close within which a contract may trade during a day — a circuit filter that caps volatility, imposes a cooling-off pause, and can halt the contract for the session.
- Lean period marginAn additional margin on agricultural commodity futures during the pre-harvest lean period, when uncertainty about crop size makes spot prices volatile; the periods and rates are set by exchange circular.
- 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.