SEBI's new peak margin rules for traders

The concept of peak margin reporting has been adopted from today, December 1, 2020. This would have a huge effect on the intraday margin/limit that clients, along with other adjustments, are currently enjoying. 

For all segments- cash, futures and options, and commodities, the concept of peak margin will be applicable. However, because 90% of market trading occurs in derivatives, the effect would be the maximum there.

Requirement for peak margin

Until now on the basis of end-of-day positions, or the positions that a client carries forward to the next day, the monitoring for margin criteria has taken place. The exchange imposes a margin on the consumer based on these positions. However, four snapshots of the positions of a customer will be taken through the day under peak margin reporting. To measure his peak margin requirement for the day the highest of those positions will be taken. From now on, the end-of-the-day margin will also apply, and the peak margin will also apply. The former would prevail if the peak margin requirement is higher than the end-of-day margin requirement.

Example

In a day for instance, if you bought five lots of Nifty futures at 11 am and five more at 12 noon before squaring it all off at 3 pm, it would be tested whether or not you had Rs 15 lakh (peak margin needed for the position) in your account. If there is some deficit, brokers will be punished.

As of today, December 1, the law will be applied. This is to stop the over-leveraging phase, which generates risks in the financial market.

Brokers frequently promise high leverage of about 50 times to their clients.  This enables clients to deposit an amount of only Rs. 1 lakh and buy intra-day securities worth Rs. 50 lakhs. Though at the end-of-day, they square off all the positions, or bring forward only specific positions, so that the Rs.1 lakh in their account is enough to satisfy their margin requirements.

This is the trend from December 1, which SEBI aims to counter. The peak position of the customer was Rs.50 lakh during the day in the example above so his peak margin requirement will be measured on Rs. 50 lakhs. Now both the peak margin requirement (at its Rs. 50 lakh position) and the end-of-day margin requirement will be registered (on Rs. 1 lakh). At its peak position during the day the customer must meet margin requirements.

Phased implementation

SEBI will introduce its new rule in a phased manner to avoid a big jolt to institutional investors. Customers would have to comply with margin specifications

· December 2020 to February 2021 -25% of the Peak Margin

· 50 percent of Peak Margin- March 2021-May 2021

· 75 percent of Peak Margin- June 2021-August 2021

· 100% of the Peak Margin from September 2021 onwards

As of September 1, 2021, customers will have to meet 100 percent of the margin requirement. Assume that on December 2 a customer did some trading and Rs. 1 lakh was its peak margin requirement. There must be at least 25 percent of this sum, or Rs. 25,000, in his account. He must have Rs. 50,000 for a comparable volume of trade between March and May. This sum will grow to Rs. 75,000 between June and August. And finally, the customer would need to have Rs. 1 lakh in his account from September 1.

Hedged positions (While Exiting)

As you seem to be aware that exchange has recently dramatically reduced margins for Hedged positions in options and futures, it is important to take care of your hedge position while exiting it. You are expected to First Square off position with higher margin and Then Square off the other leg when exiting from Hedge position.   If you square off the leg that hedges the margin usage of your positions, jumps several folds due to which your account will have a peak margin shortage.

Examples

· You need to square off Nifty Future first and PE later if you have a Nifty future Buy spot along with one ATM Put Option in that case.

· If at the moment of square off you have a Sell position in Nifty 13000 CE and Buy in 13100 CE, we need to exit 13000 CE first and 13100 CE later  selling for intraday trade from holdings.