From September 1, 2021, the Securities and Exchange Board of India’s (SEBI) peak margin regulations’ fourth and final phase will take effect, requiring stock and commodity brokers to receive 100% of the total margin necessary for beginning intraday trades.
Last year, the SEBI enacted peak margin limits with the goal of reducing speculative share sessions and limiting the leverage that brokers can provide their clients. As a result, beginning in December 2020, brokers will switch from utilising the end-of-day position to using the intraday peak position to compute margin requirements.
The rules require the exchange to take photographs of all margins at four different periods during the day, with the greatest margin being the peak margin. To put it another way, if a trader wishes to open a position for Rs 1 lakh and the margin on that transaction is Rs 30,000, the trader will now have to put up 100% of Rs 30,000 in margin with his broker.
Rule applies to both the cash and the F&O segments
Previously, margins were collected in advance and calculated using end-of-day positions. The broker provided clients’ intraday positions as far as the outstanding towards the day’s end was less than what they had already deposited.
The new rules will be introduced in stages, with the first starting in December 2020. Traders have to keep at least 25% of the peak margin between December 2020 and February 2021. Between March and May, this margin was increased to 50%. (second phase). Between June and August, it increased to 75%. (third phase). It will be increased to 100% on September 1st.
Further Key Takeaways
Meanwhile, brokers have expressed their displeasure with the new law, claiming that the higher margin requirements are imposing “unjustified penalties” on traders. An industry association representing brokers, the Association of National Exchanges Members of India, wrote to SEBI earlier this month, noting some of the challenges they encounter.
According to them, the increased margin requirements are causing certain irregularities, such as unjustified penalties being imposed on trading members for failing to meet the requirement.
The new upfront peak margin compels a trading member to collect uncrystallized and unpredictable peak margin from clients ahead of time. In other words, before clients engage in trades, trading members are required to collect upfront money,” the association wrote in its letter to SEBI. The brokers had raised a number of concerns about their ability to meet the margin requirements.
Frequently Asked Questions
What are the new rules for peak margins?
The new upfront peak margin compels a trading member to collect uncrystallised and unpredictable peak margin from clients ahead of time. To put it another way, trading members are required to collect money upfront before clients engage in deals.
What is the formula for calculating the peak margin?
Clearing corporations take photographs of all margins at random points throughout the day to determine the peak margin position intraday, and the highest margin of the four snapshots obtained becomes the peak margin.
What are SEBI’s responsibilities?
SEBI’s primary responsibility is to regulate the Indian capital markets. By enforcing certain laws and regulations, it supervises and controls the stock market and protects the interests of investors.
What is Margin Trading?
Margin trading is a method of purchasing stocks more than what you cannot afford. You are permitted to purchase stocks for a fraction of their true value. This margin is paid in cash or as a security in the form of stock. Your margin trading operations are funded by your broker.
From September 1, 2021, there will be no additional margins apart from VAR+ELM (equity) and Span + Exposure (F&O). But because each stock has a different VAR + ELM, SEBI has proposed that a minimum of VAR+ELM or 20 per cent of trade value would need to be collected upfront (intraday trades included).
The margin requirement for this stock is 10%, which means you need to maintain 10% of the total trade value in your account as a margin. Without the Peak Margin Rules, you would only need to maintain 10% of the total trade value at the time of entering the trade, which is ₹2,000 (10% of 100 shares * ₹200 per share).
Peak Margin was introduced to set stricter controls on leverage, and in turn influence the risk a trader was able to take for a position. Peak Margin was also able to control excessive speculation since the margin is collected upfront and not at the end of the day.
As per the exchange rules, If (VaR Margin+ ELM)= X%, the margin requirement is at X% or 20%, whichever is higher. For instance, if (VaR+ELM)=17%, Angel One considers the margin requirement as 20%. For instance, if (VaR+ELM)=28%, Angel One considers the margin requirement as 28%.
What is peak margin? Your highest margin utilization on the Trade Date or highest Limit utilization on order placement level & status change (such as cancellation) is considered as Peak Margin required for the day. *Please note Brokerage would not exceed the SEBI prescribed limit.
SEBI introduced the peak margin penalty in 2020 to limit intraday leverage in trading, capping equity leverage at 5x. This penalty, active by September 2021, involved capturing snapshots of traders' positions throughout the day, with a penalty for insufficient margin.
Peak Margins are the regulated margins introduced mainly to ensure the control on the leverages becomes stricter. Due to the introduction of Peak Margin, most of the excessive speculation also became controlled since the margin started to be collected upfront. Unlike the old way, i.e., at the end position of the day.
Angel One's consolidated profit came in at ₹260.3 crore for the third quarter ended December 31, compared with ₹228 crore a year ago in the same period, according to an exchange filing.
For intraday trading also traders now have to deposit 20 percent of the transaction volume with the broker to avail margin facility. You can pledge existing securities in your DEMAT account as collateral. Ask your broker for a complete updated list of investment instruments that you can use as collateral.
A good margin level is typically considered to be above 100%. A margin level of 100% indicates that a trader's equity equals the used margin, which is the minimum level required to keep positions open.
According to the SEBI new rules for intraday margin, a broker is allowed to give the leverage of a maximum of 5X. This means that you can trade with 5 times more money than you already have.
How long can I hold the stocks purchased via Pay Later (MTF)? You can hold your position under Pay Later (MTF) for a maximum of 90 days. Post 90 days, your position will be squared off based on script-wise ageing to the extent of the debit overdue by 90 days.
For example, if a broker allows a customer to trade for ₹ 10 Lakhs with only ₹ 10,000 or 1% and if the stock moves say 10% instantly, the customer loses ₹ 10,000, but the broker loses ₹ 90,000 (until the broker is able to recover the money from the customer).
How does the Margin Level of a trading account fall or rise? If your open positions don't work out and you make losses, your Account Equity will fall - and along with it the Margin Level. If you make a profit, this will top up your balance and your Margin Level will rise.
FINRA Rule 4210 requires that you maintain a minimum of 25% equity in your margin account at all times. Most brokerage firms maintain margin requirements that meet or, in many cases, exceed those set forth by regulators.
The exchange has revised the rules for the fulfillment of the total margin required for all trades in the F&O segment. From now on, the brokers have to ensure that a minimum of 50% of the total margin required is in the form of cash for all the positions in the F&O segment.
Let us see how this works using an example that you sold your shares for ₹50K on a given day. Under the new rule of option short-selling margin, 80% of this amount, that is ₹40K, will be available for immediate use to purchase new shares.
The existing rules allow investors to cover their margins entirely with their securities. But as per the new rules, they will need to keep 50% of the value in cash in their account as margins to trade in these segments.
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