New peak margin norms: Trading off to a smooth start in derivatives segment

Our Bureau Mumbai | Updated on December 01, 2020 Published on December 01, 2020

Analysts had expected some confusion on Day 1

Unlike the chaos that hit India’s stock market during September due to new margin norms in the cash segment, Tuesday’s trading session was relatively calm when stringent margin norms were introduced in the equity derivative segment.

On Tuesday, a few leading brokers told BusinessLine that the trading and settlement was normal and without any chaos. Brokers had raised severe concerns with regard to the new derivative norms. Brokers had mainly highlighted their concern with regard to the new system of ‘peak margin’ collections.

Peak margin is the collection or reporting of client margin by stock brokers during the day based on peak theory. Clearing arms of stock exchanges send four snapshots of broker and client wise trading positions based on which highest margin has to be considered for payment.

The issue that brokers are concerned was that such practice would lead to chaos as it so happens that several clients square-up their entire position before the market closes but are yet subject to ‘peak’ margins, brokers say.

A trader is required to have 25 per cent of peak margin currently and this will increase to 50 per cent from March 1, 2021, and further 75 per cent from June 2021 and finally to 100 per cent from September 1, 2021.

According to Vinay Punjabi, Head of Sales & Marketing, Ventura Securities, brokers who were giving very high leverages for intraday trading in cash, futures and options will have to restrict these leverages to a maximum of 4 times of margin till Feb 2021. Then, 2 times till May 2021 and 1.33 times till August 2021 and 1 time from September 2021.

Effectively, for a ₹1.6 lakh Nifty futures contract, a minimum of ₹40,000, ₹80,000, ₹1.2 lakh and ₹1.6 lakh would be required, till February 2021, May , August and September 2021 respectively.

‘Wait & Watch’

“The first day of new margin norms including peak margin rules passed with much ado. But that is also due to the fact that last Thursday’s derivative expiry saw many traders squaring up their positions. We need to wait and watch during the coming days,” said a member of a Brokers Association.

Two of the leading brokers association in India BSE Brokers Forum and ANMI (NSE Brokers) had written to SEBI that peak margin was causing chaos in the cash segment and they feared it could also lead to disruption in the derivatives segment.

In September, the average trading volumes in the first six trading sessions post the introduction of cash margin norms had seen a 25 per cent decline on the NSE and 29 per cent fall on the BSE. For nearly a week, the volumes showed no signs of any major improvement. But then traders returned and accepted the higher margin outgo as the markets kept rising and hit new peaks.

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Published on December 01, 2020
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