Implementation of Peak Margin from Dec 1st and how it will impact the market participants ?

Friday, 27 November 2020

From December 1, 2020, the concept of peak margin reporting will be introduced. This will have a big impact on the intraday margin/limit that customers enjoy currently along with other changes. In this article, we shall first explain what the concept of peak margin means, and then examine how the Securities and Exchange Board of India’s (Sebi) new rules (introduced through circular dated July 20, 2020) will impact stock market participants.

The concept of peak margin will apply to all segments – cash, futures and options, and commodities. However, since 90 per cent of the trading in the market happens in derivatives, the impact will be the highest there.

Peak margin requirement

Until now, the reporting for margin requirements happened on the basis of end-of-day positions, or the positions that a client carries forward to the next day. Based on these positions, the exchange imposes a margin on the customer.Under peak margin reporting however, four snapshots of a client’s positions will be taken across the day. The highest of these positions will be taken to calculate his peak margin requirement for the day. Henceforth, end-of-the-day margin will also be applicable and peak margin will also be applicable. If peak margin requirement is higher than end-of-day margin requirement, that former will prevail.

Often, brokers promise their customers high leverage of say 50 times. This allows customers to deposit an amount of just Rs. 1 lakh and purchase securities worth Rs. 50 lakh intra-day. At the end of the day however, they square off all their positions, or carry forward only limited positions, so that the Rs. 1 lakh in their account suffices to meet their margin requirement.  

This is the practice Sebi aims to curb from December 1. In the example above, during the day, the customer’s peak position was Rs. 50 lakh, so his peak margin requirement will be calculated on Rs. 50 lakh. Now, both will be registered – peak margin requirement (on his position of Rs. 50 lakh) and end-of-the-day margin requirement (on Rs. 1 lakh). The client must fulfil margin requirements on his highest position during the day.

Latest Margins/Leverages can be checked here.

Phased adoption

To avoid a big jolt to market participants, Sebi will introduce its new rule in a phased manner. Customers will have to meet margin requirements 

December 2020 – February 2021 −25% of Peak Margin

March 2021 – May 2021− 50% of Peak Margin

June 2021 – August 2021− 75% of Peak Margin

September 2021 onwards 100% of Peak Margin

From September 1, 2021, clients will have to fulfil 100 per cent of margin requirement.

Suppose that a client did some trading on December 2 and his peak margin requirement was Rs. 1 lakh. At least 25 per cent of this amount, or Rs. 25,000, must be there in his account. Between March and May, for a similar amount of trading, he must have Rs. 50,000. Between June and August, this amount will rise to Rs. 75,000. And finally, from September 1, the customer will need to have Rs. 1 lakh in his account.

Changes at SAS Online

  • Leverage provided will be changed and the latest leverages can be checked here.
  • Changes in Credit for selling from Holdings.

 

Changes in Credit for selling from Holdings.

From 07th Dec 2020 if you sell any stocks from your holdings you will be getting 80% credit of the sell value on T day and complete 100% on T+1 day. Reason for the same is currently Margin reporting was happening as per end of the day positions but from now on Peak Margins will also be considered for margin reporting along with End of the day.

Say you sold some stocks from your holdings till now we used to give total value as credit and at end of the we used to do early payin to depositories so that end of the day margins are not levied in your account same procedure will be followed even now but with introduction of Peak Margin Reporting we need to report the highest margin levied in your account during the day also to exchanges.

Let’s say you sold 1 lac worth shares and at the end of the day you decide to buy back those sold shares. Ideally there will be no end of the margins since it’s an Intraday trade but with the introduction of Peak margin, 20% of sell value will be levied in your account. Check this article for details regarding upfront margins in the cash segment. If you dont have any cash in your account, peak margin will be short and penalties will be levied. To avoid margin shortage and avoid these penalties we will be  giving credit of 80%  i,e RS 80,000/-. We will do Early Payin of 20% stock that will cover the margin requirement . Please note in this case, you will be able to buy back Rs 80,000/- worth shares and Rs 20,000/- will be blocked for Peak margin reporting

Margin Increased mid-market or post market closing 

Exchange updates the margin required for trading in any script multiple times during the day based on Volatility. It may happen that margin requirement in a position created at market opening increases mid-market as per updated SPAN file from exchange. In case one doesn't have sufficient margin to account for this increase,  Peak Margin will be short Especially in cases of Option writing the MTM is added to the margin required. The mid market span file received during the day from the exchange reflects the increased margin. Traders are advised to keep margin utilization % below 90% and keep 10% free to account for increase in mid market margin requirements

Margin Shortage in Carry Forward positions leading to Peak Margin Shortage next day

Up-till now if carry forward margin was short in your account SAS Online would give margin call & give time till next day market closing to fund your account or reduce positions. However now due to 100% peak margin implementation your peak margin will become short if you do not top-up before the market opens the next day. Traders are advised to keep excess margin at all times and top up account before market opening in case there is margin shortage 

Selling from Holdings for intraday trading

Whenever you sell any shares from your holdings and use the proceeds for intraday trading (in any segment like Cash, F&O or CDS) and buy back the sold shares at the end of the day peak margin may be short if you don't have any other margin in your account

Let’s say you have 1000 shares of ITC in holdings and sold them at Rs 200/- . Total credit released for further trading will be Rs 1,60,000 as explained above and let’s say you have used this amount to trade intraday in Nifty future whose approx. margin we will consider as 1,20,000. Now you have bought and sold 1 nifty future and at the end of the day you have decided to buy back ITC shares. You buy back 800 QTY i.e. 80% of them now as per peak margin concept. If you are not having any cash balance margin for intraday NIFTY trade will be short . We will do Early payin of 200 shares ITC which will cover margin requirements for ITC trade but if you don't have any cash/ shares in your account margin for Intraday NIFTY trade will be short

Hedged positions (While Exiting)

As you are aware the exchange has recently reduced margins considerably for Hedged positions in options and futures which can be checked here, it is important to take care while exiting your hedge position. While exiting from Hedge position you are required to First Square off position with higher margin and Then Square off the other leg. In case you square off the leg which is hedging your positions, margin utilization jumps many fold due to which there can be peak margin shortage in your account.

Traders need to be careful of this specially on EXPIRY DAY. If you have position in next expiry and have hedged the same with current expiry remember not to leave the position which is hedging your position to expire at market closing or it may lead to margin shortage 

Examples:-

*If you have a Nifty future Buy position along with One ATM Put Option in that case, you need to square off Nifty Future first and PE later.

*If you have a Sell position in Nifty 13000 CE and Buy in 13100 CE at the time of square off, first we need to exit 13000 CE and 13100 CE later.

Intraday profits

As you are aware that all realised intraday profit in Cash Market gets settled on T+2 day and  All realised intraday F&O profits and realised Marked to Market (M2M) profit in futures gets settled on T+1 day. These profits should not be used for new positions on the same day since this will lead to Peak Margin Shortage

Let’s say you have 1 lac and made some intraday profit of 20K now total balance will be 1.2 lac .now if you make one nifty trade of Buy and sell whose margin is approx. 1.2 lac there will be a peak margin shortage for 20k as the actual balance available in your account is 1 lac only and the remaining amount is yet to be received.

Selling carry forwarded Buy Options for intraday trading

Whenever you sell any carry forwarded Option and use the proceeds for intraday trading (in any segment like Cash, F&O or CDS) and buy back the sold Options at the end of the day peak margin may be short if you don't have any other margin in your account.

Let’s say you have carry forwarded  one lot of Nifty Option and sold it @100 so total credit received will be 5000 (100*50) now if you have used the amount to make some intraday trades whose margin is Rs 5000/- and decided to buy back the sold option at the end of the day now since free balance is used up for buying option which is sold there will be Peak Margin shortage for the intraday trade.

Penalty in case of margin shortfall

The penalty structure has two slabs:

Short collection for each client

Penalty percentage

(< Rs 1 lakh) And (< 10% of applicable margin)

0.5%

(=> Rs 1 lakh) Or (= >10% of applicable margin)

1.0%

Moreover, if there is a shortfall in margin requirement for three consecutive days, then a penalty of 5 per cent of the shortfall amount is levied. If the shortfall is for more than five days in a month, then also a penalty of 5 per cent is levied for each day, during the month, beyond the 5th day. Thus, the minimum level of penalty is 0.5 per cent and it can go as high as 5 per cent.

What should clients do?

Once the circular is implemented from December 1, all broking houses will be able to offer the same level of leverage. Therefore, new customers should abandon the practice of choosing a broker based on the level of leverage offered (this was anyway not an advisable practice), since all will come to the same level.

If, after December 1, a client wishes to take bigger positions with a small amount of capital, he should take hedged positions in derivatives. Indian exchanges have reduced their margin requirements drastically for hedged positions from June 1, 2020.Deatils can be checked in following link

Impact on brokers 

More than 90 per cent of the trading that happens in the markets is intraday. Most of the revenue that brokers earn is also from intraday trading. When clients generate high turnover, higher brokerage is generated. Once the margin requirement is introduced from December 1, the level of leverage permitted in the market will begin to reduce. Therefore, the level of turnover will also reduce, and this will have an impact on brokers' revenue. Also whatever leverage would be provided would have to be from the brokers own funds and not other clients funds so overall revenue would go down and cost of doing business would go up

Points to Remember

*80% Credit will be provided against Delivery sold in CNC Product,For Intra-day trade Kindly use MIS product type.

*Kindly square off position with higher margin when exiting a hedge position or peak margin may be short 


Comments

 
  1. Though this step is a very cruel one, we can't do anything about this. Leverage is indeed a double edged sword but it should have been there for those who are willing to take that risk. Anyway, thanks SAS Online for a thorough update.
    Gurpreet Singh Grover (December 5, 2020 at 11:08pm)
  2. What the Option buyers Say is, "Who Cares", even they say "thanks to SAS Online for an update".
    Galib Ansari (December 10, 2020 at 01:01pm)
 

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