Sebi weighs revamp of margin rules to reflect new-age market risks

India’s market regulator, the Securities and Exchange Board of India (Sebi), is evaluating a major overhaul of its margin rules for cash equities and derivatives trading to better align with contemporary market risks. The Risk Management Review Committee (RMRC) is assessing whether the current framework, which relies heavily on the outdated Standard Portfolio Analysis of Risk (SPAN) model—adopted in 2000—can adequately address emerging threats such as cybersecurity breaches, AI-driven vulnerabilities, and high-frequency algorithmic trading. The SPAN model, originally developed by the Chicago Mercantile Exchange, calculates potential one-day losses using historical volatility data, with margin requirements based on standard deviations. However, Sebi officials suggest the system’s reliance on classical assumptions may no longer suffice for today’s complex markets. The regulator has previously flagged AI-related risks, including the potential misuse of tools like Claude Mythos for detecting and exploiting system weaknesses, as highlighted in a May 5 advisory. In the cash equities segment, brokers currently enforce Value-at-Risk (VaR) and Extreme Loss Margins (ELM) before trade execution, with margins varying by stock liquidity—ranging from 9% for highly liquid Group I stocks to 50-75% for illiquid Group III stocks. Additional ELM charges of 3.5% for stocks and 2% for index ETFs further bolster protection against market shocks. Meanwhile, derivatives trading margins include SPAN-based requirements alongside ELM charges of 2% for index contracts and 3.5% for stock derivatives. The review remains in preliminary stages, with no final decisions reached, though officials indicate certain SPAN components and adjoining margin systems may undergo adjustments. Sebi’s task force, *cyber-suraksha.ai*, continues to address AI-driven threats, emphasizing concerns over data confidentiality, system integrity, and output reliability in high-frequency trading environments. The regulator’s push for reform reflects broader global shifts in risk management, as traditional models struggle to keep pace with technological advancements. While Sebi has not yet announced specific changes, market participants are closely monitoring developments, given the potential impact on trading costs and liquidity.