Margin is required by exchanges to make sure that traders and investors who wish to buy securities actually have the required funds to go through with the purchase. Simply put, Margin is the minimum amount of funds or securities that need to be held in your trading account to place a successful trade of a certain value.
In order to bring in additional transparency in this regard, SEBI introduced “Peak Margin”.
Prior to Peak Margin
- Upfront margin was collected only for the derivatives segment
- At the end of the day, Brokers reported client transactions along with the collected margin to the exchanges and clearing corporations
Peak Margin was introduced from 01-Dec-20. With this, to calculate the margin obligation, exchanges and clearing corporations have to take a minimum of 4 random snapshots of trading positions. The highest margin of these 4 snapshots is considered as the Peak Margin of the day.
Consider this example: Assume the following screenshots of your positions are taken during the trading day:
Position 1 – Rs 1,00,000; Position 2 – Rs 1,25,000; Position 3 – Rs 50,000; Position 4 – Rs 75,000
Assume VAR = 20%, ELM = 5%. The Minimum Margin Requirement (VAR + ELM) would be:
Position 1 – Rs 25,000; Position 2 – Rs 31,250; Position 3 – Rs 12,500; Position 4 – Rs 18,750
The Peak Margin for the day would be the highest = Rs 31,250
Peak Margin was introduced in 4-Stages, and the percentage of margin required was gradually increased.
- Phase 1 (01-Dec-20 to 28-Feb-21) – 25% Peak Margin required
- Phase 2 (01-Mar-21 to 31-May-21) – 50% Peak Margin required
- Phase 3 (01-Jun-21 to 31-Aug-21) – 75% Peak Margin required
- Phase 4 (01-Sep-21 onwards) – 100% Peak Margin required
Hence, from 01-Sep-21 onwards, if a trader or investor wishes to buy a security worth Rs 1 lakh and the margin required for that order is Rs 30,000, then he will have to put up 100% margin or Rs 30,000 upfront with his broker in order to place that trade.
Why is Peak Margin important?
Using margin, traders and investors can buy securities on credit. When the margin requirement is low or less, the trader needs lower capital to place a trade. This created a situation of high leverage.
Peak Margin was introduced to set stricter controls on leverage, and in turn influence the risk a trader was able to take for a position. Peak Margin was also able to control excessive speculation since the margin is collected upfront and not at the end of the day. This arrangement does not give speculative traders time to ramp up their positions during the day with limited funds.
What does Peak Margin mean for you?
- You will need to pay upfront margin before placing any trade across all segments.
- You will need to ensure that you maintain an account balance equal to or more than the peak margin requirement in order to execute your order.
- You will need to meet your Margin requirements so that you do not have to pay Margin Shortfall penalty
Revisions to Peak Margin norms w.e.f 01-Aug-22
Post feedback from the industry, SEBI issued some revisions to the peak margin rules to offer some relief to brokers who were incurring huge penalties due to the new Peak Margin rules. As per the update, SEBI reduced the count of calculating the peak margins to once a day before the opening of the equity market, so that there is no fluctuation in the margin rate due to changes in the price of the underlying security.
If you trade in the Cash Segment, then this revision will not impact the way you trade. However, if you trade in derivatives, including commodities, then this change will impact you.
Consider this illustration: Assume you trade in Nifty Options and you need a margin of Rs 10,000 at the start of the trading day to take a certain position. Let’s assume that your account has Rs 11,000 in funds. As you are aware, the market is volatile, and hence due to market fluctuations, the margin requirement for the same position reaches Rs 12,000 during the day. You are now falling short of your Margin requirement and hence will be liable to pay the Margin Shortfall penalty.
However, starting 01-Aug-22, the margin requirement at the start of the day will only be considered throughout the trading session. And hence you will not be liable for the Margin Shortfall Penalty. What this means is that in the example above, Rs 10,000 will be considered as your Margin Requirement for the entire trading day for that specific position, and since your account had adequate funds, you would not have to pay any penalty.
Yes, you would now need to put up more capital for certain trades as compared to before, which in turn might impact your return on investment. But it’s important to note that while leverage can help you magnify your gains, it can also multiply your losses. Hence controls like Peak Margin are helpful to bring in better control.