The Securities and Exchange Board of India (SEBI) ‘s new peak margin norms are set to come into force from 1st September. The stock market might undergo a radical shift when these norms come into effect. The peak margin rule has significantly hiked the initial money requirement to trade.
According to the peak margin rule, traders will be required to shell out 100% margin upfront for their trades. Market experts opine that this will impact intraday trade.
Traders taking intraday positions are likely to be impacted the most since in the earlier system margins were calculated on end-of-the-day basis. Instead, from Wednesday onwards, the exchanges will sample the prices four times every session and the margins would be calculated based on this. So even the intra-day positions will come under margining.
It may be noted that the market regulator had introduced new margin rules a year ago for day traders.
Over a year, SEBI has rolled out peak margin system in four phases: first phase with 25% peak margin, second phase with 50% peak margin, third phase with 75% peak margin and finally the complete implementation of upfront margin with effect from 1st September.
As part of the final phase of the new peak margin rules, stockbrokers will face a penalty if margins collected from traders is less than 100% of trade value in the case of cash market stocks and an additional Span + Exposure for derivatives trade.
After the new norms were announced, stockbrokers stopped using end-of-day positions to calculate margin requirements and shifted to using intraday peak positions from December 2020.
Traders trading futures and options (F&O) will have to shell out higher margin money making these trades more expensive.
As per the new norms, they would be required to shell out 100% of margin upfront under the new peak margin norms. These margins would apply even to intra-day positions i.e. the ones where the trader enters and sells the contracts within the same market session. Currently, the upfront margin required is 75% of the total margin. For instance, let’s say if a trader wants to buy a Nifty contract worth Rs 10 lakh, the margin at 20% would be around Rs 2 lakh. Until 31st August, the upfront margin is only Rs 1.75 lakh.
According to the new norms, clearing corporations will seek minimum margin throughout the session and forcing brokers to collect additional margin from clients if they fall short. Stockbrokers who fail to do so will face a penalty.
Till 2020, margins were collected based on end-of-the-day positions. For instance, let’s say, a client had exposure to Rs 1 crore worth F&O securities as on yesterday and he has taken up further exposure of Rs 1 crore during the current market session. As per the old system, traders were not required to pay margin money for the Rs 1 crore additional exposure taken until the end of the session. This benefited the active traders since if the additional exposure taken was sold off by the end of the session, the transaction would not need any special margin money to be brought in.
Earlier, Association of National Exchanges Members of India (ANMI), had termed SEBI’s new peak margin rule as unfair and had even urged SEBI to reconsider its peak margin norms, especially related to intra-day trade.
ANMI had also noted that 100% levy on intraday trades is 3.33% higher than what should be the actual peak margin. Earlier this month, ANMI even wrote to SEBI that it is impossible to comply with its provisions of peak margin. Many (traditional) brokers even believe that the earlier margin rules were adequate in risk management and that the peak margin norms introduced by the market regulator are draconian.
In its letter to SEBI, ANMI wrote, “New margin requirements are resulting in certain anomalies, whereby unwarranted penalties are levied on trading members for not complying with the requirement. The new upfront peak margin essentially requires a trading member to collect uncrystallised and uncertain peak margin from clients in advance. In other words, the trading members are mandated to collect upfront money before clients undertake trades.”
“We have frequently observed instances where clients have maintained sufficient margins right until the point of market close, and have yet ended up facing a margin shortfall after the import of the last file for the day. Since the last file comes well past market closing time, there is no way to recover the additional margin from the client in case the crystallised margin increases significantly. This leads to the levy of undue penalties,” ANMI wrote in its letter while highlighting about the undue penalties.
The National Stock Exchange (NSE) has told brokers that parameters for computation of margin will be updated as specified by the relevant authority from time to time. Currently, the parameters are updated six times a day based on the share prices at 11:00 a.m., 12:30 p.m., 3:30 p.m., end of the day and the beginning. Risk parameters generated based on the update are provided on NSE’s website. Brokers contend that this leads to undue penalties on end-of-day margins, despite the client and trading member doing everything to maintain sufficient margins in the account during the day.
Traders are angry since they will have to reluctantly pay more money to bet in the stock market, especially intraday and futures trade. It may be noted that traders will also have to pay a penalty if the peak margin norms are not followed during a trading session.