How does the margining system change the way people trade?
One of the subtle and valuable things about a good margining system is the way it changes the behaviour of people who trade. People will always adjust their behaviour to minimise the margins that they have to pay up. If margins are calculated correctly using portfolio reasoning, then we will start seeing the phenomenon of undiversified risk” diminishing. As in the Apollo Tyres case, the level of initial margin charged there would be very steep (a limit of three times base capital) and people would start avoiding such risks. Such understanding, and wisdom in safe speculation, will be good for exchanges and good for the country. As long as we charge initial margin in the form of fixed rules like 10 times base capital”, we do not give people incentives for improving their skills in diversification and hedging.
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