Due to the new margin rules, the trading community and brokerage houses are facing uncertainties regarding how much money they need to bring in and how much money the exchanges should be paid.
As per the new rule, brokers need to take four snapshots of margin during the session at random times and based on that, the snapshot with the highest margin requirement is considered for payment. Earlier, this was done only at the end of the day.
With the increased volatility in the stock market, the margin requirements fluctuate and traders are required to add more funds to continue with their existing positions. This causes inconvenience to them as they are not sure how much funds will be required to avoid auto-square off of their trades.
For the brokers, it is uncertain how volatility will affect the margin payment by end of the day. Snapshots are taken when there is a spike in the market causing an unrealistic amount of margin increment and such a higher amount is then required to be paid.
Peak margin is the total margin of a client from all the segments such as equity, derivatives, currency, and commodities. The stockbrokers have to report these total margins throughout the day of their clients. The brokers are supposed to take random snapshots of margin positions during the trading session and report them. Based on the highest margin amount, the payment has to be made to the exchanges.
To reduce the retail investor’s exposure to risk, market regulator SEBI has started increasing the margin requirement in a phased manner starting from 2020. A sudden spike in retail participation in the wake of the pandemic made the authority take such action. It was also necessary to bring down the leverage taken by novice traders.
In Phase I, a minimum of 25% of the margin was required to trade. This reduced the extent of margin and leverage the brokers provided to its customers and brought uniformity. In phases II and III, the margin requirement was raised to 50% and 75% respectively.
The final Phase IV implementation happened from 1st September 2021 when the 100% margin requirement was accomplished.
What is SPAN margin?
The SPAN stands for standardized portfolio analysis. SPAN margin in the stock market is the minimum that is required to enter a trade in the derivatives segment. The stock exchange blocks a certain amount when a trader enters into a position of writing an option or entering into a future trade.
Who specifies margin requirements?
The margin requirements are specified by the respective stock exchange but the rules and regulations regarding the same are governed and overlooked by the SEBI. The amount of margin required for taking the trade is blocked by the stock exchange but the quantum of such amount is decided by the SEBI.
What are the different types of margins in Indian stock markets?
Margins are the way stock exchanges manage their risks. Different segments have different risk percentages and margin requirements are different based upon that. Therefore we have various types of margins such as value at risk margin, extreme loss margin, span margin, exposure margin, and mark to market margin.
Enjoy Zero Brokerage on Equity Delivery
Join our 1.75 Cr+ happy customers
Enjoy Zero Brokerage on