Leveraged trading in F&O capped at eight times the initial margin

Stock broker will not be able to allow their clients more than around 8 times leveraged trading in equity derivative segment even for intra-day trades following new guidelines issued by the stock exchanges. Until now, several brokers extended leverage of up to 10 or even 20 times the initial margin deposited by clients. Simply put, 12.5 per cent is the minimum initial margin that would be required for traders even on orders that are squared up at the end of the day.

Guidelines and a circular with regard to margin even for intra-day trades in equity derivative segment were issued by the National Stock Exchange on December 31, 2019.

Also, there were many brokers who did not even collect any initial margin for intra-day trades, a practice which will have to be discontinued now. Shares lying with a brokers who also handles client demat account can be considered as margin, experts say.

“In the F&O (futures and options) segment, it is mandatory for trading members to collect initial margin, net buy premium, delivery margin & exposure margin from respective clients on an upfront basis. It must be ensured that all upfront margins are collected in advance of trade. Mark-to-market losses (MTM) shall be collected from clients by T+1 (today+1) day,” NSE’s December 31 guidelines said.

“Basically, the clarification says that the entire initial margin — which is SPAN+Exposure for F&O, and VAR+ELM (value at risk and extreme loss margin) for equity, has to be collected upfront before taking a trade, even if it is an intra-day trade. Intra-day products were being offered with additional leverage by the entire broking industry until now. This will have to stop going forward. With this clarification, it is now black and white. No broker will be able to offer any additional intraday leverage on F&O,” said Nithin Kamath, founder and CEO, Zerodha.

For trading Nifty futures, the margin requirement comes to around 11.5 per cent which translates to trading position of around 92. Similarly, to trade a stock like Reliance Industries worth ₹100 the margin would come to around 12.5 per cent as per the exchange criteria, which translates to around 8 times the margin. According to Kamath, while the minimum VAR+ELM requirement for stocks is new, the additional intra-day leverage that all brokerage firms offered for F&O was due to the ambiguity on margin reporting which existed.

“While this is bad for our business and the industry in the short term, as the trading volumes and revenue may drop, it hopefully will help improve the shallow participation in capital markets bogged down by active traders turning inactive due to trading losses which are potentially triggered by leverage,” Kamath explained further.

Commodity derivative

In the commodity derivative segment too, the NSE has said that initial margin will have to be collected.

“Initial Margin and extreme loss margins shall be collected from client on an upfront basis. It must be ensured that all upfront margins are collected in advance of trade. Other margins such as Mark-to-market margin (MTM), delivery margin, special/additional Margin or such other margins as may be prescribed form time to time, shall be collected within ‘T+2’ working days from their clients,” the NSE said.