Personal Finance

New peak margin rules and how it will impact you

Akhil Nallamuthu | Updated on September 01, 2021

Investors and traders who generally pay full traded value need not worry. Participants trading intraday will be the most affected

BL Research Bureau

The final phase of implementation of the peak margin rules comes into effect today. This means market participants are required to pay 100 per cent upfront margin while initiating a trade.

Earlier phases and margin requirements were as follows : Beginning December 1, at least 25 per cent of the peak margin obligation was to be met ; from March 1, 2021, 50 per cent of the peak margin obligation and 75 per cent from June 1, 2021, were to be met.

Here we explain what the new rule is and clarify how can it impact you.

What is peak margin?

Peak margin is the minimum margin that a trader or an investor should maintain either in the form of funds or securities based on all open positions at any given time. It is calculated based on minimum 20 per cent for stocks and minimum of sum of SPAN and exposure margins for F&O.

Suppose you buy a stock worth ₹1 lakh, the upfront margin requirement will be ₹20,000. It is worth noting that 20 per cent is minimum margin and it can go up depending on the stock. That is, stock that are more volatile might require higher margins.

In F&O, say, a trader buys one lot of Nifty futures. The margin requirement for Nifty futures can be about ₹1.2 lakh (can vary from broker to broker). From September 1, 2021, the trader should maintain this margin whatsoever. Else, the order will not go through i.e., he/she cannot initiate a trade. Earlier say, in January, it was just 25 per cent of ₹1.2 lakh i.e., ₹30,000.

What has changed?

The major change is that the participants should now satisfy both peak margin and end of day (EOD) margin obligation while earlier EOD margin requirement was the only matter of concern. Thus, brokers had this leeway for giving additional leverage for intraday positions. In other words, the margin collected was way less than the margin required, on the condition that those trades will be closed by the end of the day.

For the purpose of peak margin reporting, henceforth, brokers will be sent four snap shots a day by the clearing member (CM) with the client wise margin amount that should have been collected upfront. This move will put an end to excess intraday leverage.

Importantly, participants also have to deal with the limited usability of the proceeds from the sale of shares that they owned. That is, only 80 per cent of the sale value can be utilised as margin for new trades.

Who will be impacted ?

Investors and traders who generally pay full traded value need not worry since it will not impact them in any way. Participants trading intraday will be the most affected. Before the new rules came into effect in December last year, traders were able to trade with very high levels of leverage. There were instances where traders were able to punch-in intraday trades with less than 25 per cent of their actual margin obligation. Considering the above Nifty futures example, some brokers allowed (strictly for intraday positions) their clients to initiate buy/sell in with less than ₹30,000.

Such practices will not be allowed henceforth and not satisfying the peak margin obligation can result in brokers paying penalties. Thus, brokers are not expected to offer huge intraday leverages like before. This can bring down the return on investment on intraday trades as one needs to mobilise more funds or securities than earlier to satisfy the peak margin requirement for the same value of trade.

Higher margin requirements mean the daily trading volume is likely to take a hit. While this may not have significant impact on the liquidity in index derivatives, large cap stocks and their derivative contracts, traders dealing with less liquid stocks may face more difficulty. Less liquidity can lead to higher bid-ask spread adding to the cost of trading.

Published on September 01, 2021

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