SPAN vs Initial Margin vs Exposure Margin
Indian F&O margin requirements consist of three layers — SPAN margin, exposure margin, and (for options sellers) premium margin — each computed differently and serving a distinct risk-management purpose within the exchange clearing system.
The Standard Portfolio Analysis of Risk (SPAN) margin was developed by the Chicago Mercantile Exchange and adopted by NSE and BSE for their derivatives markets. SPAN calculates the worst-case loss a portfolio could sustain over a single trading day by scanning a set of 16 scenarios that vary the underlying price and volatility simultaneously. NSE's SPAN computation runs at end-of-day and also during the day for intraday risk management. The result is a rupee figure that the clearing corporation requires as the minimum margin for a given position.
Exposure margin is an additional buffer charged on top of SPAN, expressed as a percentage of the notional value of the contract. For index derivatives it has typically been set at 3% of notional value and for individual stock derivatives at 5-7.5% of notional. The exposure margin exists to cover gaps in price — situations where the underlying opens significantly away from the previous close, creating losses that exceed what SPAN anticipated based on normal intraday volatility assumptions. In practice, SEBI mandates that brokers collect both SPAN and exposure margin upfront before allowing a position to be opened.
For options buyers, total margin is simply the premium paid. Since the buyer's loss is limited to the premium, no SPAN or exposure margin is required beyond the option purchase cost. For options sellers (writers), however, SPAN and exposure margins are collected on the notional obligation created by the short option position. These margins can be substantial relative to the premium received, which is why options writing requires significantly more capital than options buying for the same notional exposure.
SEBI's 2020 circular mandating collection of upfront SPAN plus exposure margin (replacing the earlier peak margin calculation methodology) significantly changed the economics of retail F&O trading. Brokers can no longer allow intraday leverage that reduces to zero margin if positions are closed before day-end. This reform was aimed at reducing systemic risk from intraday positions that were effectively uncollateralised, particularly relevant after the Yes Bank and Dewan Housing Finance crises exposed gaps in the margin system.
For portfolio margining, SPAN netting benefits arise when a trader holds offsetting positions. A long futures position partially offsets the margin requirement of a short call at the same strike, for instance. The SPAN system recognises these correlations and computes the net portfolio risk rather than summing individual position margins, resulting in lower total margin for hedged positions — an important capital efficiency consideration for market makers and systematic traders.