The effect of phase 2 peak margin on investors
An update that will increase peak margin has been implemented from 1-3-2021. This update will be the 2nd phase of peak margin and will consist of 50% of upfront margin, span + exposure margin, and is implemented across all segments. To understand this, we first need to grasp the concept of peak margin.
Peak margin, in simple terms, is the minimum margin requirements that a broker must collect in advance of placing any trade order in the cash or derivatives segments. These are collective reportings by brokers across various trading segments, namely equity, equity futures and options, currency futures and options, commodities futures, and options.
The clearing corporations will randomly take four snapshots at a particular time window on open positions during the day to arrive at such peak margins. The peak margin would be the highest margin requirement from these four snapshots. The main aim of this exercise is to restrain the excessive leverage for intraday and derivatives positions.
However, the intraday traders square-up their positions, and due to the snapshots of peak margins, they get into shortfalls due to leveraged intraday positions.
The phases of peak margin
Phase 1 1st Dec 2020 - 28th Feb 2021
25% of the client’s peak margin obligation across the snapshots will be compared with the client’s respective peak margin available with the Trading Member/Clearing Member (TM/CM) during the day.
Phase 2 1st Mar 2021 – 31st May 2021
50% of the client’s peak margin obligation across the snapshots will be compared with the client’s respective peak margin available with the Trading Member/Clearing Member (TM/CM) during the day.
Phase 3 1st June 2021 – 31st Aug 2021
75% of the client’s peak margin obligation across the snapshots will be compared with the client’s respective peak margin available with the Trading Member/Clearing Member (TM/CM) during the day.
1st Sep onwards
100% of the client’s peak margin obligation across the snapshots will be compared with the client’s respective peak margin available with the Trading Member/Clearing Member (TM/CM) during the day.
How the phase 2 peak margin will affect the investors
It is established that with the new phase of peak margin, the investor would be affected in some way, shape or, form.
The following table will explain the margin applicable on the intraday positions
|Equity||Futures and Options|
|50% on applicable VAR (Value at Risk) + ELM (Extreme loss Margin) or 20% of trade value||50% on SPAN + Exposure Margin|
The following points should also be considered:
- The maximum intraday limit will be 10x and will depend on the VAR margin in the equity segment.
- The maximum intraday limit will be 2x in the derivative segment across all exchanges.
- The minimum amount of margin for equity will be 10% for intraday and 50% for the derivative segment, as mentioned in the table.
However, the important thing to consider as an investor is that as the margins have doubled, your exposure in the trades will also be affected and enhanced. Hence, the probability of penalties reaching 1.5x-2x is certain.
Updates regarding the margin rule by SEBI
The main aim of SEBI is to bring transparency and a uniform playing field for each investor. These phases were focused on preventing the brokers from misusing the investor's securities. Moreover, Derivatives are known to be synthetic instrument, which attracts both strategy based players and speculators and to counter this, SEBI has been raising margins and the size of contracts but the brokers on the other hand neutralized it with the same amount of increasing multipliers. This pattern led to a rise of systemic risk for brokers who took the risk on their books.
With excessive exposure on trades by brokers, the turnover for delivery trades was around 70%, which usually is 25-30%. Therefore, with this regulation SEBI aimed for genuine investments rather than speculative ones.
Moreover, the collection of upfront margin was not necessary, but with this new phase, the investors will have to pay a minimum of 30% margin upfront to avail the margin loan. Apart from this, previously, the clients were required to meet the margin requirements in their account only once at the end of the day. But, with this new rule, SEBI will require them to fulfill their margin obligations at the beginning of the deal.
SEBI has put much stress on the EPN (Early paying), which will make the process hassle free and margins could be utilized more efficiently. This factor will aid SEBI focus on T+1 settlement cycle.
The following list will simplify the changes that may occur due to this:
- Intraday: Fixed margins must be there to ensure a uniform playing field.
- Intraday Option Selling: The options which expires on Thursday will be affected. Previously, brokers were allowing leverage up to 50x or even 100x. However, this practice would be ceased.
- Sell transaction from Demat: Only 80% from sell proceeds can be utilized for further exposure.
- BTST: Previously, the transaction type (buy today sell tomorrow) was popular and this cycle continued with the second buy on the same day using the proceeds of sell transaction of the day. However, now it is restricted to 40% (20% and the other 20% is blocked and can be released with EPI)
Hedged positions: Make sure to exit both position at the same time and if that is not possible exit high margin position first. The table below will explain this concept.
BUY/SELL futures first (vs) a hedge in the form of BOUGHT option. SOLD options first (vs) BOUGHT options. Future carries a higher margin than the hedge position of a bought option. Hence, futures to be squared-off first. Sold options carries a higher margin than hedge position of a bought option. Hence, sold options to be squared-off first.
Impact of peak margin on stockbrokers, broking volumes, and retail clients
Due to peak margin, stockbrokers having in-house research teams will be able to balance their revenue streams in a much more efficient manner and thus focusing more on delivery-based transactions. Moreover, with peak margin the broking volumes will be reduced, and with this reduced volume there will be reduced speculative trades. All these factors will provide persistence to retail clients in their trades.
With low volume to trade with, retail clients will try to step in trades that are genuine and not speculative. However, some brokers requested SEBI on maintaining status-quo on the derivative segment and not implement the 50% margin requirements. The reason behind this request was that a jump from 25% to 50% would affect the brokerage business and retail clients as the 25% margin requirements were efficient in managing risk due to intra-day volatility.
Phase 1 1st Dec 2020 – 28th Feb 2021
Penalty If margin blocked is less than 25% of the minimum 20% of the trade value (VAR + ELM) for stocks or SPAN+EXPOSURE for F&O.
Phase 2 1st Mar 2021 – 31st May 2021
Penalty If margin blocked is less than 50% of the minimum margin requirements.
Phase 3 1st June 2021 – 31st Aug 2021
Penalty If margin blocked is less than 75% of the minimum margin requirements.
Phase 4 1st Sep onwards
Penalty If margin blocked is less than 100% of the minimum margin requirements.
Penalty in case of margin shortfall structure
|Short collection for each client Penalty percentage||Penalty percentage|
|(<Rs 1 lakh) and (<10% of applicable margin)||0.5%|
|(=> Rs 1 lakh) or (=> 10% of applicable margin)||1.0%|
An important notice
In a case where there is a short/non-collection of margins for more than 3 consecutive days or for more than 5 days in a month, a penalty of 5% of the shortfall shall be imposed.
GST of 18% shall be applicable to the penalty amount.
Sebi Circular SEBI/HO/MRD2/DCAP/CIR/P/2020/127 dated July 20, 2020
Find the original circular here.
An important thing to consider in the circular is that any shortfall in the margin collection obligation will be considered for a penalty. Moreover, in the case of crash market, the peak margin will be applicable till T+2 until pay in for the delivery positions.