Exposure Margin
An additional margin buffer collected by NSE over and above the SPAN margin for futures and short options positions, designed to cover extreme price movements and liquidity risks not fully captured by the SPAN model.
The SPAN margin system — which NSE adopted from the Chicago Mercantile Exchange — computed the risk of a portfolio of futures and options positions using a scenario-based matrix that considered price moves, volatility shifts, and time decay. However, SEBI and NSE recognised that SPAN alone did not account for gap risk (overnight price jumps far exceeding the assumed scan range), liquidity risk in thinly traded contracts, and model error during stress conditions. The exposure margin was introduced as a second layer of protection.
For index futures, the exposure margin was set at 3 percent of the notional contract value. For stock futures, it was set at 5 percent of the notional value or 1.5 times the standard deviation of daily returns of the stock over the preceding six months, whichever was higher. The higher percentage for stock futures reflected the greater idiosyncratic risk of single-stock positions relative to diversified index positions.
For options, the exposure margin was applicable only to the short (seller) side. Option buyers had already paid the premium in full, so their maximum loss was bounded by the premium paid. Option sellers, however, faced potentially unlimited (for naked calls) or large (for naked puts) losses. The exposure margin for short options was computed based on the delta-weighted notional value of the position.
The exposure margin was distinct from the SPAN margin in computation method: while SPAN was calculated at the portfolio level (netting long and short positions), the exposure margin was computed on the gross notional of individual positions without portfolio offsets in many configurations. This meant that traders who had delta-neutral strategies (long and short positions with offsetting risk) still paid exposure margin on each leg.
From the broker's perspective, the exposure margin formed part of the total margin block at the time of order execution. Clients needed to have both SPAN and exposure margins available before a position could be opened. Failure to maintain both components contributed to the margin shortfall calculation under SEBI's peak margin framework.