New trade rules augur well, yet pinch

The new peak margin rules of the Securities and Exchange Board of India (SEBI) announced through a circular in July became effective on December 1. This could mean an end to excess intraday leverage offered by brokers to their clients. As per the new rules, brokers are mandated to collect stipulated margins upfront, i.e., before a trade is initiated.

While regulation requires upfront collection of minimum 20 per cent of the transaction value as margin for cash segment, brokers can even collect margin equal to the sum of VaR (value at risk) margin and ELM (extreme loss margin), which can top 20 per cent.

In case of futures and options (F&O), the margin collected upfront should be no less than SPAN (standardised portfolio analysis of risk) margin plus exposure margin.

VaR margin intends to cover the largest loss that can be encountered for 99 per cent of the days and ELM, collected in addition to VaR margin, is like a second line of defense if the losses go beyond 99 per cent of the day. SPAN margin and exposure margin for F&O are like VaR margin and ELM for the cash segment.

What is peak margin?

Beginning December 1, market participants should meet at least 25 per cent of their peak margin obligation. From March 1, 2021, 50 per cent of the peak margin obligation should be met; 75 per cent from June 1, 2021 and the entire margin obligation should be fulfilled from September 1, 2021.

Peak margin obligation 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.

Say, a trader buys one lot of Nifty futures and stocks worth ₹1 lakh. The margin requirement for Nifty futures is about ₹1.5 lakh i.e. 15 per cent of the notional value of ₹10 lakhs (futures price multiplied by lot size) whereas for stocks it is ₹20,000 (i.e., 20 per cent of the transaction value). Therefore, the peak margin obligation for this trader will be ₹1.7 lakh and this requirement should be satisfied even if these trades are squared off intraday.

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 actually 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 will put an end to excess intraday leverage.

Traders and investors also have to deal with the limited usability of the proceeds from sale of shares. From December 1, only 80 per cent of the sale value can be utilised as margin on the day of selling. That is, if someone sells shares worth ₹1 lakh, only ₹80,000 can be used to fulfil margin obligations of new trades.

What it means to you

Higher intraday margin requirement means that the return-on-investment (ROI) on intraday trades can drop significantly, especially in the F&O segment. With peak margin obligation required to be maintained for every trade, traders or investors continuously looking for opportunities will need higher buffer capital.

Though traders and investors seem to be disadvantaged, only those who have been using higher leverage to make intraday profits consistently seem set to lose. Otherwise, these measures can bring down excessive speculation and instil discipline, thus reducing chances of losing.

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