SEBI Discontinues Calendar Spread Margin Relief for Single Stock Derivatives on Contract Expiry Date

The Securities and Exchange Board of India (SEBI) has introduced significant modifications to the margin computation framework applicable to calendar spread positions in single stock derivatives. This regulatory update specifically addresses the treatment of such positions on the day when contracts reach their expiry. The new directive brings single stock derivatives in alignment with the existing provisions applicable to index derivatives, thereby creating uniformity across derivative segments.

Background of Calendar Spread Margin Framework

Calendar spread positions represent a trading strategy wherein an assessee holds offsetting positions across different contract expiration months for the same underlying security or index. Under the prevailing regulatory framework, margin benefits have been extended to such spread positions, allowing for reduced margin requirements when positions across multiple expiries are maintained simultaneously. This arrangement recognizes that opposing positions across different expiry cycles carry inherently lower risk compared to outright directional positions.

The margin offset mechanism has been designed to ensure that market participants are not burdened with excessive collateral requirements when their risk exposure is naturally hedged through calendar spreads. However, the regulatory authority has identified specific concerns regarding the continuance of such benefits on expiry days, particularly in the context of single stock derivatives.

Existing Framework for Index Derivatives

Prior to this regulatory intervention, SEBI had already implemented restrictions on calendar spread margin benefits for index derivatives on expiry days. As per Clause 1.2.7 of Chapter 5 of SEBI Master Circular dated December 30, 2024, positions involving index derivatives do not receive calendar spread treatment on the day when contracts expire. This restriction was introduced to mitigate the operational and financial risks that emerge when one leg of a calendar spread position expires while the other leg remains open.

The rationale behind this restriction stems from the observation that upon expiry of one contract, the remaining position transforms from a spread position to an outright naked position, thereby significantly increasing the risk profile. The sudden change in margin requirements post-expiry could potentially expose trading members and their clients to margin shortfalls, especially if adverse price movements occur in the open leg immediately after expiry settlement.

Trigger for Extension to Single Stock Derivatives

The current regulatory amendment has been prompted by representations received from trading member(s) who highlighted similar risks existing in single stock derivative positions. These concerns were thoroughly examined by SEBI in consultation with the Secondary Market Advisory Committee (SMAC), which deliberated on the potential ramifications of continuing calendar spread benefits for single stocks on expiry days.

After comprehensive analysis and consultation, the regulatory authority concluded that the risk profile of calendar spreads in single stock derivatives on expiry days is comparable to that of index derivatives. Therefore, extending the same restriction to single stock derivatives would serve the dual purpose of risk mitigation and regulatory consistency.

Details of the New Regulatory Framework

Under the revised framework effective from three months after the circular dated February 5, 2026, calendar spread margin benefits will not be available on the expiry day for positions involving contracts that are expiring on that particular day in single stock derivatives. This restriction applies specifically to spread positions where at least one leg comprises contracts expiring on the current day.

However, it is crucial to note that this restriction does not impact calendar spread positions involving contracts that are not expiring on the given day. Such positions will continue to receive the margin offset benefits as per the existing framework outlined in Clause 1.2.6 of Chapter 5 of SEBI Master Circular dated December 30, 2024 for Stock Exchanges and Clearing Corporations.