Important Trading Update: Margin and Trading Exposures
The Securities and Exchange Board of India (SEBI) had announced new margin trading rules to be implemented in the country from September 1, 2021. Let’s delve into the new rules of margin trading in India and understand how the changes impact traders and stockbrokers.
What is margin, and how many types of margins are there?
Margin refers to the collateral that an investor offers the broker to cover credit risk. There are different types of margin as given below:
- VaR or value at risk: The VaR covers one-day losses for liquid stocks and three-day losses for illiquid stocks. This margin covers the largest loss encountered on 99% of the days. It is directly linked to market volatility and is updated six times a day.
- ELM or extreme loss margin: This is a fixed additional margin that covers extended losses beyond the 99% of the VaR margin.
- SPAN margin: The SPAN margin is the minimum required margin that a trader pays to cover 99% value at risk for a day.
- Exposure margin: This margin is an additional margin that is collected over and above the SPAN margin.
- Mark to market margin: This margin is calculated at the end of the day. The transaction price of a share for a particular day is compared with the closing price of the share for the same day to determine the mark-to-mark margin.
What is the new peak margin rule?
For instance, you open a demat account to trade in shares. Stocks are part of the CDSL or the NSDL--depending on if they belong to Bombay Stock Exchange or Nifty respectively. Therefore, you pay a charge to either of these depositories.
Now, your demat account is directly managed via a broker or mediating bank. This entity is known as depository participant. Some DP charges are levied on behalf of these mediating institutions.
Also Read: How to Transfer Money from Demat Account to Bank Account
How will the new norms be implemented in margin trading online?
SEBI announced that the implementation would be carried out for three months in phases. In the first Phase 1, the client will have 25% of the peak margin with the broker. This was to be carried out from December 2020 to February 2020. The second phase that lasted between March 2020 and May 2020 mandated the clients to have 50% of the peak margin to be available with the broker. Lastly, the third phase from June 2021, and August 2021, stated that the client must have a 75% peak margin with the broker. As of September 2021, all clients should have 100% peak margins.
Starting from December 1, there are restrictions on the maximum leverage that can be provided for intraday trading on a trading account online. Moreover, only VAR + ELM and Span + Exposure margins will be allowed as additional margins in margin trading in India. However, a minimum of VAR + ELM or 20% of the trade value would be collected upfront. As a result, the maximum intraday leverage for stocks will now be 20% of the trade value.
Traders who use a Demat trading account or T1 for selling stocks for margin trading in India will have access to only 80% credit against the value of the sale of future trades on the day of selling. The credit value was 100% before the new rules were implied.
What happens if the client does not have a peak margin?
In case of non-compliance with the margin rules while margin trading in India, a penalty ranging between 0.5% and 1% can be imposed. In case of no margins for over 3 consecutive days or over 5 days in a month, the penalty can be increased up to 5%.
How do the changes in margin trading online impact brokers and traders?
The new rules will have repercussions for the traders as well as the broker. Traders will have to use more cash to fulfil margin requirements for their trades. The changes will also result in increasing the costs of futures and options (F&O), thereby making them more expensive. Coupled with penalties, this can increase costs for traders.
The stockbrokers association was also visibly upset with the new rules. The association also wrote to SEBI stating that it would be nearly impossible to comply with the new regulations of peak margin. However, the new norms are expected to bring in more transparency into the system, thereby increasing confidence in investors and traders.
To sum it up
Although the new rules of margin trading in India may pose inconvenience in the short term, greater transparency can offer a more structured system to investors in the long term.
Share Market Knowledge Centre
- Demat account
- Share market
- Trading account
- Online share trading
- Intraday trading
- Futures trading
- Commodities trading
- Currency trading
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Frequently Asked Questions
Given below are three types of margins levied in the Futures and Options segment:
- Initial Margin
- Exposure margin
Given below are three types of margins levied in the cash market segment in margin trading in India:
- Value at Risk (VaR) margin
- Extreme loss margin
- Mark to market Margin
A penalty ranging from a minimum of 0.5% and a maximum of 5% can be imposed in case of non-compliance with the new rules of margin trading in India.
The new rule will be implemented from September 1, 2021, onwards.