NISM-Series-VIII: Equity Derivatives · Introduction to Clearing and Settlement System

Margining and Risk Management in Equity Derivatives

Updated 11 October 2026 · Fact-checked

Margining is the system by which the clearing corporation collects money from members to cover potential losses on open positions. Total margin is initial margin (SPAN plus exposure margin) plus daily mark-to-market settlement. To solve questions, identify the margin type, what it covers, and who pays it.

Understand Margining and Risk Management

A clearing corporation guarantees every trade. To do this safely, it must make sure the person who loses can pay. Margin is the money or collateral deposited to make that possible. It is a good-faith deposit against default, not a fee or a cost of trading.

Initial margin covers the largest loss a position could suffer in a single day, estimated with a statistical model at a high confidence level. It is collected upfront when you take a position. For futures and options it is mainly calculated using SPAN (Standard Portfolio Analysis of Risk). SPAN looks at your whole portfolio, not one contract at a time.

SPAN builds a risk array for each contract. The array shows the gain or loss under 16 scenarios of price change and volatility change. The worst loss across scenarios is the scanning risk. SPAN then adjusts for offsetting positions in the same underlying (calendar spread charge, inter-commodity credit) and applies a minimum charge for short options (short option minimum). Long options need only the premium paid, so no margin is blocked beyond it.

Exposure margin is charged on top of SPAN as a cushion against losses beyond the model's estimate. For index products it is a percentage of the notional value of the position; for stock products it is the higher of a stated percentage of notional value or a multiple of the standard deviation, as prescribed by the exchange. Mark-to-market (MTM) margin is different. It is the daily settlement of profits and losses at the day's settlement price. Losses are paid in cash by the next morning, and gains are credited.

Margin can be given as collateral: cash, bank guarantee, fixed deposit receipts, approved securities (with haircuts) and other approved forms. A minimum portion of the requirement must be in cash or cash equivalent. Members collect margins from clients and must report client margins to the clearing corporation. If margin collected is short, penalties apply. The rules on timing and amounts are set by SEBI and the exchanges and change from time to time, so read the current NISM workbook for exact figures.

Key formulas to remember

Total margin on a position: Initial margin = SPAN margin + Exposure margin; Initial margin is collected upfront. MTM is separate and is settled daily.
SPAN margin: SPAN margin = Scanning risk + Calendar spread charge − Inter-commodity/spread credit, subject to short option minimum; Calculated at portfolio level. Scanning risk is the worst loss across the 16 scenarios.
Exposure margin (index futures, simple form): Exposure margin = Exposure % × Contract value; Contract value = price × lot size × number of lots. Use the percentage given in the question.
Daily MTM: MTM (long) = (Today's settlement price − Previous settlement price) × Quantity; For a short position, reverse the sign. On the day of trade, use the trade price instead of the previous settlement price.
Long option margin: Long option: premium paid, no further margin; Short option positions attract SPAN and exposure margin.

How to solve Margining and Risk Management questions

Use this method for any margining question, whether it is conceptual or numerical.

1Read the question and identify the margin type asked: initial, SPAN, exposure, MTM or collateral.
2Check the position: long or short, futures or option. Long options need only premium.
3If numerical, compute contract value first: price × lot size × lots.
4Apply the percentage or amount given in the question. Do not use remembered percentages if the question supplies one.
5For MTM, find the price change from the reference price and multiply by quantity. Fix the sign by position direction.
6Add components only where the definition says so: initial margin is SPAN plus exposure; MTM is not added in.
7Eliminate options that mix up who pays, when it is paid, or what it covers.

Quickest way: Match the margin to its purpose

When to use it: Use for definition and concept MCQs where four options swap the roles of the margins.

SPAN = worst one-day portfolio loss by scenarios.
Exposure = extra cushion over SPAN.
MTM = daily profit or loss settlement, paid in cash.
Collateral = what you deposit; cash portion has a minimum.
If an option says long options need SPAN or MTM margin blocked beyond premium, treat it with suspicion.

Common mistakes in Margining and Risk Management

Treating MTM margin as part of initial margin.
Both are called margin, so students lump them together.
Fix: Initial margin is collected upfront for potential loss. MTM settles actual daily gains and losses.
Thinking SPAN is calculated contract by contract.
Students picture margin as a flat percentage of one position.
Fix: SPAN is portfolio based and recognises offsetting positions, so a spread needs less margin than two outright positions.
Saying buyers of options pay SPAN margin.
Students assume every derivative position needs margin.
Fix: The option buyer pays the premium in full and has no further obligation. The seller pays margin.
Calculating contract value without the lot size.
Students use price per unit only.
Fix: Always multiply price × lot size × lots before applying any percentage.
Getting the MTM sign wrong for short positions.
Students use the long formula for all positions.
Fix: A price rise is a loss for a short seller. Reverse the sign for shorts.
Assuming all margin can be given as securities.
Collateral lists look flexible.
Fix: A minimum portion must be in cash or cash equivalent, and securities carry haircuts.

Worked examples

Example 1

An investor buys 2 lots of an index future at ₹20,000. Lot size is 50. The exchange charges exposure margin of 2% of contract value. Find the exposure margin.

Show the solution

Contract value = 20,000 × 50 × 2 = ₹20,00,000.
Exposure margin = 2% × ₹20,00,000.
2% of ₹20,00,000 = ₹40,000.

Answer: ₹40,000

Example 2

A trader sells 1 lot of a stock future (lot size 1,000) at ₹500. The settlement price that day is ₹510. Find the MTM amount and say who pays.

Show the solution

Price change = 510 − 500 = ₹10 upward.
For a short position, a price rise is a loss.
Loss = 10 × 1,000 = ₹10,000.
The trader must pay ₹10,000 in cash through the clearing member by the next morning.

Answer: MTM loss of ₹10,000, payable by the short seller

Exam tips

Know the purpose of each margin in one line. Most MCQs test only that.
Remember that long options need no margin beyond premium, which is a favourite trap.
For numericals, write contract value first, then apply the percentage. Do this even if it feels slow.
Learn the exact current penalty and cash-component figures from the latest NISM workbook, because they are revised by SEBI and do not rely on old notes.
With 25% negative marking, skip a question only if you cannot narrow to two options.

Practice questions from Introduction to Clearing and Settlement System

Margining and Risk Management in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

FRM Part IIVariation Margin, Margin Period of Risk and Remargining

Margining and Risk Management: frequently asked questions

What is the difference between initial margin and exposure margin?

Initial margin is the total upfront margin and is made of SPAN margin plus exposure margin. SPAN covers the estimated worst one-day loss. Exposure margin is an additional cushion on top of it.

What is SPAN margin in simple words?

SPAN is a risk model that tests your whole portfolio against 16 price and volatility scenarios. The largest loss becomes the base of your margin. It also gives credit for offsetting positions.

Is MTM margin paid upfront?

No. MTM is the daily settlement of profit or loss at the settlement price. Losses are paid in cash and gains are credited.

What happens if margin is short?

The member or client faces penalties under SEBI and exchange rules, and the position may be restricted or closed. Check the latest NISM workbook for the exact penalty rates and timelines.