Margin plays a vital role when you are trading in cash and derivatives (Futures & Options) segments. As the market is volatile in nature, thus, the exchange asks for specific upfront money to carry out your trades flawlessly. This upfront money is known as margin and if there is any difference in this upfront balance then it is called Margin Shortfall.
Margin Shortfall penalty is applicable on Intraday positions as well as on overnight positions held without sufficient margin. It is applicable on equity, commodity, and currency futures of all segments including NSE, BSE, and MCX.
Here are a few instances where your account’s open position under cash as well as derivatives segments can lead to margin shortage and penalty can be levied.
Credit for sell @ 80%
As per SEBI guidelines, if you sell shares out of your Demat account, 80% of the sale proceeds gets available on the same day that you can use to enter into another trade or take another position. In case, later on, you buy back these shares using the same sale proceeds, it will be treated as an Intraday trade. Thus, you won’t be able to do early pay-in that may result in margin shortage and if you have insufficient balance, a penalty will be levied.
For example, you only have 50 shares worth Rs. 2000 of X company and no other margin in your account. Now, you sold these 50 shares for Rs. 1,00,000 at 10 am on a particular date, so you will get credit of Rs. 80,000 as per the guidelines that you can use to trade. On the same day, at 11 am, you bought 20 shares at Rs. 100 per share for Rs. 20,000 of Y company. At 2 pm, you bought back 50 shares of X company again on margin which will convert your Delivery Sell trade into Intraday trade. In such a situation, you have used the sale proceeds to enter into another trade that might lead to a shortfall of Rs. 20,000. So, if you don’t have sufficient balance in your account, a penalty will be imposed on you.
Increase in margin amount by the exchange
Brokerage firms like Angel One collect upfront margin for flawless trade execution. However, the exchange can increase the margin amount anytime during the day or even after the market closes. This unexpected increase will unknowingly result in margin shortage which will be subject to penalty by the exchange.
Stock ITM (In The Money) position under-delivery period
When you carry forward the stock options position for a particular company and the stock goes into ITM position (a situation in which the strike price is exceeded by the current price of the stock) then your outstanding stock position will be liable for delivery margin which you can pay till T+1 day . In such a case if you do not have sufficient margin in your account, it will lead to margin shortage and a penalty will be imposed by the exchange.
Unhedge the portfolio
Some derivative positions such as hedge, synthetic options, calendar, etc. are a natural hedge to each other. They reduce margin requirements if positioned together. But, if you unhedge these positions, there is a possibility that your margin requirement may increase that might lead to a shortfall.
For example, if you buy a future position of company X and buy a put option of company X, you can create a hedge position. However, if you exit the put option by selling then the margin requirement will instantly increase. This may lead to a margin shortfall that will attract a penalty. Let’s say, you buy a future NIFTY of a lot size of 50 at Rs. 17,547 & buy put option for the same at a strike price of Rs. 17,600, then the margin required is Rs. 21,528. However, if you sell put then the margin requirement will shoot up to Rs. 1,08,582. In this case, if you don’t have sufficient balance in your Angel One account then a penalty might be levied.
Mark to Market
The process of settling out profits and losses at the end of every trading day is known as Mark to Market (MTM) settlement. During the day, if you have taken the position and have sufficient margin in your account, there is no margin shortage. However, if at the end of the day your Mark to Market position is increased, you will have to make the payment within T+1 day or else you will face margin shortfall leading to a penalty. For example, the margin required is Rs. 1,00,000 on T day but your MTM loss is Rs. 12,000 and if you fail to pay it within T+1 day then the penalty will be levied on the margin shortfall.
Other situations under Mark to Market are:
Mark to Market Payment On Time
If you have created a position and it gets increased subject to Mark to Market settlement at the end of the trading day and you fail to pay on T Day, peak margin obligation will come. This is because on T+1 day, your ledger will show less balance than the minimum margin required. Thus, attracting a penalty on your account.
Peak Margin Requirement
In this situation, even if you square off the position rather than maintaining the minimum margin required, a penalty will be levied under peak margin shortfall. This is because in the 1st snapshot peak margin requirement will come on your position.
Now that you know various scenarios where your margin shortfall can increase, it is easier for you to avoid margin shortfall penalties. All you can do is keep track of margin requirements, add funds immediately in case shortfall increases and maintain sufficient balance. You can easily and conveniently add or track funds in the Angel One app by clicking here.