Derivatives

How is peak margin for trades calculated

Akhil Nallamuthu BL Research Bureau | Updated on May 02, 2021

To trade in cash market or derivatives market, one should have a minimum amount of money to initiate trades, and this is called margin. Peak margin is the highest margin that a market participant should maintain on a day.

The types of margin in cash and derivatives segment include VaR (value at risk) margin, ELM (extreme loss margin), SPAN (standard portfolio analysis of risk) margin and exposure margin. There are other margins such as ad-hoc margin and MTM (mark-to-market) margin.

To initiate trade in a futures contract, the minimum amount of margin required is SPAN plus exposure margin. For instance, you buy one lot Nifty 50 futures contract, the margin requirement would be approximately ₹1.6 lakh (SPAN margin of ₹1.38 lakh and exposure margin of ₹22,000). In earlier mechanism, brokers could allow intra-day trades by collecting less margin say, ₹1 lakh by offering you additional intra-day leverage.

However, under the new margin verification mechanism, clearing corporations would be sending four snapshots of margin status a day that shows how much margin should the brokers have collected upfront. If there is any shortfall, brokers will be penalised. Because of this, the brokers will naturally refrain from offering excess intra-day leverage henceforth.

Now coming back to your positions, the different snapshots from the clearing corporation to the broker could potentially indicate that the highest margin requirement from you is ₹1.6 lakh for that day. So, the peak margin obligation for you in this example would be ₹1.6 lakh.

Send your queries to derivatives@thehindu.co.in

Published on May 01, 2021

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