As per the Exchange Circular, 1st phase of Peak Margin Reporting shall be implemented from 1st December 2020. As per this circular, the highest margin utilized by the client during the day needs to be collected and reported.
Impact of this new circular on traders
This circular is important for intraday traders using margins higher than the Exchange prescribed margins. It’ll not have any impact on delivery and options buying transactions. On account of this regulation there have been some changes to our RMS system and there are certain things which you will need to keep in mind. They are as follows.
- Reduced Intraday Exposures :- To avoid peak margin penalty, we shall start with only upto 3 times intraday exposure provided for MIS, CO and BO trades in derivative segments and upto 10 times in MIS and upto 20 times in CO and BO trades for the equity segment. However, we shall consider increasing the exposure once the new norms get settled.
- 80% sale proceeds of Demat holdings can be used on the same day :- With new a regulations, we are required to collect upfront 20% of selling credit as margin until we mark the early payin or EPI of shares to the clearing corporations (CC), which typically will happen only after the market closes on a trading day. Hence, only 80% credit against the sale value (which used to be 100% earlier) will be available for subsequent trades in the same/other segments on the selling day. For e.g. If you sell holdings worth Rs.1,000 then only Rs.800 would be visible and available for use in the same/other segments on the same day.
- Always exit the high margin leg of a hedged portfolio first :- The margin requirement framework has been modified by SEBI w.e.f June 1st, 2020. The margins for hedged positions have now dropped by significantly almost 70% as compared to earlier which you can check on our margin calculator.
Let’s try to understand this with an example. If you buy Nifty futures for overnight positions (till expiry) then you will need to keep almost Rs.1.5 lacs in your account. However, your margin requirements may go down drastically if you create a hedge position by buying a Put option near to strike price. In other words, if you create a hedge position by buying a Nifty 13000 PE then the overall margin requirements for both positions will go down to Rs.27000 (which is almost 6 times lesser). However, the margin required for your positions might change if you square off one of your hedged positions. In other words, if you happen to square off the Nifty 13000 PE then immediately your margin requirements will increase to Rs.1.5 lacs as you no longer have a hedged position.
In case the Peak Margin snapshot is taken by the Exchange before you are able to square off your Nifty futures position, your Peak Margin will be much higher than your available balance. In this case, you’ll be charged the margin shortfall penalty. Hence, it is advisable to square off those positions first which requires higher margin. So as per the above instance, it’s always best to always first exit the Nifty futures (as it requires higher margin) to avoid potential peak margin shortfall and penalty.
- Don’t use Sale proceeds of Demat holdings for subsequent intraday trades in the same/other segments on the selling day if you plan to buyback the holdings: The reason we can allow you to use the credit from selling stocks for subsequent trades in the same/other segments on the selling day is that we debit the shares from your Demat and give it to the clearing corporation(CC) on the same trading day (Early payin or EPI). These stocks transferred as EPI can be then considered as margins, both for upfront and peak margin requirements.
For example, you sold stocks worth Rs 1 lakh and get Rs 80,000 (80% of 1 lakh) credit against that to use for other trades. Then you use this Rs 80,000 for other intraday trades which you then square off and later buy back the stock you had sold in delivery. Here we’ll be able to do early payin of stocks worth Rs 20,000 only. However, your intraday margin requirement was of Rs 80,000. This means that when you traded with Rs 80,000 you were short Rs 60,000 (Rs 80,000 – Rs 20,000) on which there can potentially be a peak margin penalty.
How does it work?
Clearing Corporations (who settle trades) of stock exchanges send 4 snapshots of client wise margin used to brokers during the trading session. Out of these snapshots the highest margin (20% for Cash Segments or Span+Exposure for Derivatives Segments) will be considered as peak margin which needs to be maintained by the client.
The margin requirements shared by the Exchange includes,
- The end of the day (EOD) margin requirement
- Peak (Highest) margin requirements of the day for the client
In the current system, only the EOD margin is compared with the margin available in the client’s account at the EOD. In the new regulation, PMR is introduced and below are the changes.
- Peak margin requirement will be compared with the highest Net available balance in the client’s account during the day (Includes opening balance and funds added on the day). Failing to maintain the peak margin during the day, clients shall attract the margin short penalty though the positions have been squared off in the intraday.
- Higher of the shortfall of EOD margin and peak margin, shall be considered for levying the penalty.
Example: Assume you have a trading balance of Rs.1 lac in your trading account and broker allows 6 times exposure in intraday using which you create an intraday position for 4 lots of Nifty futures which requires margin of Rs. 6 lacs (consider highest margin required for per lot is Rs.1.5 lacs). In the current scenario, there shall not be any margin shortfall penalty as you do not have an open position at the end of the day. However, with new regulations starting from 1st December 2020 you will need to maintain ateast 25% (which shall increase in phased manner as mentioned below) of the highest margin requirements which is Rs 1.5 lacs (25% of 6 lacs) even if you square off your position in intraday. In this case, your account shall be reported with a margin shortfall amount of Rs.50000 (Minimum margin -Available balance) and penalties shall be levied accordingly (Same as FNO Penalty).
- Phase wise margin requirements
|Minimum margin requirement in a phased manner to avoid penalty|
|Peak Margin Reported||Minimum 25% of the peak margin (01Dec20 – 28Feb21)||Minimum 50% of the peak margin (01Mar21 – 31May21)||Minimum 75% of the peak margin (01Jun21-31Aug21)||100% of the peak margin (From 01Sep21 onwards)|
Is this the end of leveraged products?
At TradSmart, Of Course No!
We are working hard to come up with a solution to make margin pledging available for all the traders who have TradeSmart demat accounts with equity investments. With this offering, if you have equity investments in your holdings, these can be pledged and TradeSmart would be able to provide you with leverages on margin products where VAR +ELM or SPAN + exposure comes into play. Stay tuned for more updates.