Margin rules: What has changed after Sebi’s May 10 circular?
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At present, margin requirements are being calculated four times a session. The fresh move is expected to bring relief to traders.
Earlier, there were cases where a client could have brought in sufficient margin at the time of entering into a position, only to realise subsequently that the upfront margin requirements have increased as margin SPAN files are updated by the exchanges multiple times a day. Besides, brokers had argued that it was impossible to estimate the exact quantum of peak margins required at any time for any trading members, thereby leading to uncertainty.
Kamlesh Shah, President at ANMI, gave an example. He said if margin liability on carryforward position is Rs 100 at the beginning of the day and due to fluctuation in prices, the margin goes to Rs 102, in the absence of the new circular, brokers were required to collect an additional Rs 2 from the client.
“Now that is not required, as long as I have collected Rs 100 before the trade. It will avoid frequent calls to the client for margin purposes during the day, as we receive four snapshots in a day for peak margin. Also in the current situation, I would have paid a penalty in case I failed to collect the additional margin in time. So with this circular, neither I have to collect the additional amount during the day nor my client would be liable to pay penalty for the short collection,” Shah said.
All that a broker is required is to ensure that the applicable margin at the end of the day, as per the file given by the exchange or clearing corporation, is collected.
“As a result of this circular, our clients will be relieved of any penalty proceedings. So for intraday trade, all I have to ensure is to collect margin requirements as per BOD. These measures will go a long way in hassle free and seamless trading without compromising the amount of margin collection,” Shah said.
Margins allow traders in the stock market to buy shares on credit. Lower the margin requirements, the less the funds a person needs to invest to put through a trade. Peak margin rules had intended to set stricter limits on the amount of leverage and thus risk an investor or a trader can take in their intra-day positions.
Many experts welcomed the move.
“Various brokers’ representative bodies had cited difficulties in implementing peak margin norms as margins to be collected by the brokers fluctuated on account of the fluctuating prices of the underlying asset during day trading. The norms were a departure from the earlier practice of relying on end of day positions to calculate margins. The trading and broking community was not pleased by this move from the regulator as the chances of penalties being levied for shortfall in required margins to be maintained became more likely,” said Eishan Agnihotri, Senior Associate, Pioneer Legal.
Moin Ladha, Partner, Khaitan & Co said: “Suppose a trade buys a stock worth Rs 2 lakh that requires 20 per cent as minimum margin, the upfront funds one needs to maintain will be Rs 40,000. The new margin rules require the closing position to be Rs 2 lakh and you could intra-day exceed this amount. The peak margin rules instead limited the exposure through the trading day to Rs 2 lakh”.
“The peak margin rule had restricted brokers’ ability to fund clients’ intraday positions. In addition to that, the margin requirements were changed intraday based on the updated NSE SPAN files. So, even if clients pay margin upfront, they could incur heavy penalties based on the updated SPAN requirements during the day. This was a major cause of concern for traders as there is no way to predetermine how much SPAN margins can change after trades are initiated,” said Tejas
, CEO, FYERS.
The new framework will come into effect from August 1. The BOD margin parameters would include all SPAN margin parameters as well as Extreme Loss Margin (ELM) requirements.
The change is only for the purpose of verification of upfront collection of margins from clients. There will be no change in methodology of determination and collection of End of Day (EOD) margin obligation of the client. Also, there will be no change in the provisions relating to collection and reporting of margins in the cash segment, Sebi said.
Before peak margin rule
Before peak margin rule came into existence, margins were calculated on the basis of end-of-the- day positions.
Earlier, if a trader had exposure to Rs 1 crore worth F&O securities as of the previous day and he has taken up further exposure of Rs 1 crore during the current market session, he was, before the peak margin rule, not required to pay margin money for the Rs 1 crore additional exposure taken until the end of the session.
Post the implementation of peak margin rule, margin requirement was no longer calculated on the basis of end-of-the- day positions. Instead, the exchanges sampled the prices four times every session and the margins were calculated based on that. So even the intra-day positions came under margin.
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