To take a position in market a Margin amount is required to be maintained in your account know as initial margin which is calculated using a software called Standard Portfolio Analysis of Risk(SPAN) and therefore it is also referred to as span margin. Along with this an additional margin is collected in order to protect brokers liability which may rise because of frequent market fluctuations. This additional margin collected by brokers is known as exposure margin.
In the Indian stock market, Exposure Margin is always charged above the margin known as SPAN margin , therefore
Total Margin = SPAN Margin + Exposure Margin
Discount brokers clear its obligation with exchange on T day therefore Exposure margin collected by them is comparatively less then the brokers who clear their obligation on T-1 day.
Following are some difference between exposure margin and span margin
- Calculation of span margin is done on the basis of risk and volatility of underlying assets. Exposure margin is a form of emergency margin and is calculated on the basis of exposure taken.
- Span margin is not constant. It keeps on changing for a particular security based on market volatility. Exposure margin usually remains constant as it is basically collected for an additional safety.
Calculation of exposure margin
- For index options and futures contracts
Exposure margin is 3% of the notional value of futures contract. In options contract it is charged only for short position and is 3% of value on contract. Example: If a contract value is Rs.700000 then exposure margin will be its 3% i.e Rs.21000.
- For options contracts and futures contract on individual securities
Exposure margin is 10% or 1.5 standard deviation of the value of open position in future of individual contract which ever is higher.
Important features related to exposure margin
- Exposure margin is applicable on traders and investors while trading on NSE in futures & options contracts and on mcx in commodity derivatives.
- Exposure margin is summed up in total margin requirement by brokers. They usually charge a percentage of total margin from intraday traders since those trades are less risky. Margin amount varies from different brokers.
Though these margin amounts are huge burden on traders but they can save their money by carefully selecting broker for themselves. Opening demat account with discount brokers like Pehla Tradecan help in saving huge money. Traders can use their money to trade more in market rather then paying them to brokers.
