Consequence of Short Margin - Penalty or Square Off


What will Zerodha do if the margin we maintain in our account is less than the required margin (SPAN + Exposure) for overnight positions?
Will they levy a penalty or square off my position?
If they will levy a penalty - How is it calculated?


Hey @mrsukesh

If you do not have the sufficient margins (SPAN + Exposure), you will get a margin call and if you don’t add the require funds immediately, your position will be squared off at the discretion of the RMS team.

Margin penalty rates are explained here.

Thanks for the answer.
Is there any fixed set of rules that the RMS team follows to decide if the open positions should be squared off or it should let run with a penalty?

I am asking so that the traders can know beforehand what will happen to their open position with the current margin they have put up - Square off or Penalty?


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you will square off the position if there is a shortfall in margin, then why are you levying Penalty on shortfall amount? Ask the client to “add money else we will square off ur position”.
What is the concept of penalty?

Because in case of minor shortfall getting levying penalty is better then squaring off position so that client does not suffer loss due to auto square off also if client doesn’t want to pay penalty he should himself square of his position.
Also someone from Zerodha clarify that on what basis rms decides to cut the position or let it run so that client may be manage his trade accordingly. I mean on what percentage of margin utilisation auto square off takes place is it anywhere over 120 percent utilisation?

For all intents and purposes, as a client if you do not maintain margins your position will be squared off. The RMS team doesn’t intentionally let any position run into penalty. The margin penalty is charged by the exchange. In scenarios where a client does not make good the penalty, the broker will be held liable by the exchange to make good the amount, Which is why the RMS team squares off the position.

However, when the volatility is high, a scenario may occur where the position quickly moves against a client and runs into penalty before the RMS team squares off the position. In these case, you will be charged the penalty as per the applicable rates mentioned in this article.

Thanks @Kshiteesh_Saralaya for clearing my doubts. One more follow-up question.
Penalty is levied after squaring off the position because of shortfall of margin or it can be imposed even on shortfalls for a very short duration. Ie sometimes margins shows in negative for a very short time generally right after taking position, but after a time it comes in positive as scrip moves in your direction.

If your position has been squared off, we will not be reporting margins to the exchange. Hence, there won’t be a penalty. However, your account will likely go into debit balance.

If at the end of the trading day, you have a shortfall in margins, the same will be reported to the exchange and will attract penalty.

Hello Kshiteesh,

Just to confirm - So the margins will be reported to exchange and penalty will be applicable in 2 scenarios:

  1. There is a open position with a shortfall of margin
  2. There is no open position however there is a negative balance in the trading account (after all positions are closed, the loss has taken the trading account balance to negative)

Request to please confirm if this understanding is correct.



In this scenario, margin penalty will be levied.

No, margin penalty will be charged if you carry over a position without sufficient margins. However, A negative balance in your trading account will attract interest.

@siva @VenuMadhav suppose according to nse end of the day margin file there is negative balance say 50k and client pledges hi stock/liquibee before 4 pm which after haircut fetches margin equal to 50k. Will margin penalty be charged in this case

The need for margins is on an ‘upfront basis’. In the event that you choose to pledge liquid bees at the end of the day, margins will be made available from the next trading session, for that day, there’ll still be shortage.

As freak trades are happening nowadays for 1-2 seconds, now if I have an overnight spread that is totally hedged with the max loss let’s say 10k and because of the freak, the MTM of the sell leg shows -35k or more for 1-2 seconds, will zerodha square off my position even though it is totally hedged with max loss 10k?

Does the rms team square off all the positions in the account or square off some posiitions only to meet the shortfall. Can someone confirm?

The position will be squared off only up to the shortfall amount.