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.
What is peak margin?
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.
Recent history of margin increment
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.
Impact on Traders
- Uncertainty regarding how much margin is required to trade is leaving traders perplexed.
- It is getting difficult for traders to take on further trades since buffer margin requirements are not clear.
- A sudden spike in the market causes higher margin requirements and attracts penalties for the non-maintenance of such additional margins.
Impact on Brokers
- The changing margin requirements during the day is making compliance difficult for the brokerage houses.
- Non-compliance of such margins at the time of spike is causing brokers to pay penalties.
- If there is a major intraday move, traders will not be aware of margin requirements and the brokers will have to bear the whole penalty in case a severe correction or crash happens.
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.