PEAK MARGIN RULES FOR FUTURES AND OPTIONS BY SEBI

PEAK MARGIN RULES

 

Peak Margin Rules by SEBI - Fincareplan

 

Peak Margin Rules, the capital market regulator Securities Exchange Board of India (SEBI) has come up with new regulation in the upfront margin system in cash and future & options segment.

In November 2019, SEBI had announced the peak margin regulation for the intermediaries in the capital market but none of the trading members were ready to accept the guidelines. In July 2020, SEBI has come up with new guidelines for the margin system, but this time it was mandatory for all the stockbrokers.

It has some relaxation in implementation, the new margin rule will be implemented in a three-phase manner. Kindly check our previous articles on SEBI New Margin Rules article for better understanding.

Let us have a discussion on the intraday margin changes as per the SEBI circular



 

Margin Rules for Intraday:

 

We need to understand, what type of margin required for intraday trading and how it works in the broking terminal.

Margin Types

  • VAR ( Value At Risk )
  • ELM ( Extreme Loss Margin)
  • Adhoc Margin – margin levied on volatile stocks based on Adhoc basis

Don’t get into the statistical calculation in the margin types, these are the margin imposed by exchange, it will be changing from time to time. Let us get into the example for better understating.

 

Stock name VAR Margin ELM Adhoc rate Applicable margin rate
ITC 13.06 3.50 16.56
RELIANCE 16.68 3.50 20.18
HCL TECH 15.13 3.50 18.63

For understanding, take reliance shares, if any investors want to trade in reliance, they need margin of 20000 in his account. Before going to explain, kindly read both the SEBI circular.

 

SEBI/HO/MRD2/DCAP/CIR/P/2020/127 – JULY 2020

CIR/HO/MIRSD/DOP/CIR/P/2019/139 – NOVEMBER 2019

Once you read the above circular, let us come to an example. Try to understand with both the circular, how it will implement new margin rules.

As per November 2019 Circular

  • For buying reliance shares worth Rs. 1 lakhs, we need a margin of 20000 ( as we assumed a flat 20% of applicable margin rate )

As per July 2020 circular

  • The above margin can be implemented in a phased manner
  • 25% of the applicable margin rate from 1 December 2020 to 28 February 2021. The required margin was merely 25% of 20000 = 5000
  • 50% from 1 March 2021 to 31 May 2021 * 50% 0f 20000 = 10000
  • 75% from 1 June 2020 to 31 August 2021 * 75% of 20000 = 15000
  • 100% from 1st September 2021 = 100% means 20000 required

There is a further complication in the new peak margin rules, it will stick on the client account till T+2 days in the cash segment. This will continue to reduce the leverage for T+1 and T+2 days as well.

Don’t be confused with the rules, let us simplify for your better understanding, from September 2021, investors will require Rs. 20000, if they ready to utilize the Rs. 100000 of peak margin. Remember that, even introducing the peak margin rule, the client will get four or five times of leverage in trading. No longer will the broker not give 10 or 50 times of leverage in trading.

Margin Rules for Intraday Trading in F&O Segment

In the Futures & Options segment, the margin types are different compared to the cash segment. Let’s have a brief look on that



Margin Required for F&O Trade:

 

  • Span Margin – it’s an initial margin levied by the exchange
  • Exposure Margin – it’s an Adhoc margin levied by depository participants

For example, the client wants to trade in Nifty Futures, he will pay the span + exposure margin for trading in Intraday as well as an overnight position. Let’s check with the new margin rule.

As per November 2019 Circular

Peak Margin calculator by Zerodha

Source: Zerodha margin calculator

 

From the above image, the required margin for future trading will around 150000.

 

As per July 2020 Circular

  • The above margin can be implemented in many phases.
  • 25% of applicable margin rate from 1 December 2020 to 28 February 2021. Required margin was merely 25% of 150000 = 37500
  • 50% from 1 March 2021 to 31 May 2021 * 50% 0f 150000 = 75000
  • 75% from 1 June 2020 to 31 August 2021 * 75% of 20000 = 112500

100% from 1st September 2021 = 100% means 150000 required.

CONCLUSION:

  • Exchange provides enough leverage for the cash segment, but Futures & options segment, itself as a leveraged product.
  • After the introduction of peak margin rules, daily turnover will reduce up to 30%
  • Option sellers have no more option for high leverage trading that will create a huge impact on liquidity.
  • High leveraged trade leads to the high risk of the investors’ money. The new SEBI rules will protect the interest of investors in long term.
  • For intermediaries, it will affect the short term revenue from traders but it will ensure the continuity of the investors in the market.

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