SEBI’s new Peak Margin requirements and their impact on your trading

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SEBI’s new Peak Margin requirements and their impact on your trading

May 27, 2021
SEBI’s new Peak Margin requirements and their impact on your trading

This short piece will delve into the latest amendments and regulation made by SEBI to the Peak Margin rules and the impact these will have on your trading. Essentially, the revised rules will restrict traders from getting excessive leverage with minimum margin requirements.

Earlier, brokers like Espresso used to give leverage to customers for Intraday trading. Leverage leads to risks at the broker’s end, as there could be cases where at the end of the day customers might not be able to provide the required margin. If customers don’t provide the required margin, it leads to a shortfall.

In order to not allow this potential issue to rise in the first place, SEBI has now mandated all brokers to report margins multiple times (4 random snapshots for each client) during the day, as compared to just once at the end of the day, which was the case earlier.

As per SEBI’s Peak Margin norms, starting June 1, 2021, traders are expected to have 75% of the peak margin available with the broker; that is, Intraday leverage provided for Equity Cash would be up to 5X and F&O Intraday would be 1.33X going forward. There is no change in Equity Cash Delivery or F&O Overnight margins.

Let’s now understand the peak margin norms in more detail.

What is Peak Margin?

Margin is the amount collected by brokers from their investors/traders before a trade is executed; for example, if margin is 5% in Intraday, you can buy stocks worth Rs 1,00,000 for just Rs 5,000.

Before Dec 2020, we were able to give you a high margin for Intraday trading in Equity and F&O, which means if you had Rs 1,000 as margin, we used to allow you to trade multiple times as margin is long, and by the end of the day mark to market basically was under Rs 1,000, else we would ask customers to provide extra margin, since reporting of the margin was done at the end of the day to the Exchange.

But starting from Dec 1, 2020, SEBI moved to a concept where margin won’t be calculated on an end-of-the-day basis, but on an Intraday basis, so the Exchange will take a snapshot of the customer’s position across brokers at 4 random times, and the highest position outstanding will be considered as the Peak Upfront Margin of the day.

SEBI also informed that they would be implementing their Peak Margin requirement changes in 4 phases, as seen in the following table (Phase 3 begins on June 1):

Phases

Tenure

Margin to be maintained

Penalty if margin not maintained

Phase 1

Dec 1, 2020, to Feb 28, 2021

25% of the required margin

0.5% to 5%

Phase 2

Mar 1 to May 31, 2021

50% of the required margin

0.5% to 5%

Phase 3

June 1 to Aug 31, 2021

75% of the required margin

0.5% to 5%

Phase 4

Sept 1, 2021, onwards

100% of the required margin

0.5% to 5%

How does this impact traders?

Whenever a trader sells a stock from his demat account, 80% of the sell amount would be available to the investor immediately, but the credit available for taking other positions would be reduced. The remaining 20% will be available to the trader on T+1 (the next trading day).

Example 1

Let’s say you sell 100 shares of stock A from your demat account today with the current price of Rs 100 per share. Earlier, you used to get the entire Rs 10,000 immediately. Now, you will get 80% of the sell amount (Rs 8,000) immediately and the remaining 20% (Rs 2,000) will be available on the next trading day.

Also, for Intraday traders, leverage will get capped across brokers.

Example 2

Let’s say, for Intraday trading, you want to buy or short-sell 100 shares of stock B at Rs 100 in products like MIS+. Earlier, the margin required was around Rs 500 (5% margin for order value of Rs 10,000). Now, however, with the new Peak Margin requirements, you will need Rs 2,000 (20% margin for order value of Rs 10,000).

Earlier, for F&O traders, the margin required for buying 1 lot of NIFTY in Intraday products like MIS+ was around Rs 10,000 (7.5% margin of NIFTY’s Span+GE, which was approximately Rs 1.5 lakhs). Now, however, with the new Peak Margin requirements, from Sept 1, 2021, onwards, you will need the entire Span+GE for taking Intraday positions in Futures.

The overall effect

The new Peak Margin rules will reduce liquidity in the market, as customers won’t get extra leverage.

Since leverage is reduced to earn the same profits, you need to keep more margin, which will impact any trader’s potential returns percentage.

The penalty for margin shortfalls or non-collection is in the range of 0.5% and 1%, depending on the short collection. If there’s a shortfall or non-collection of margins for over three consecutive days or over five days per month, the penalty can go up to 5%. Additionally, there is also an 18% GST applicable (that is, 5.9%).

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!