So I just had some queries relating to how the required margins are updated by the exchange. Cause if I had better knowledge about how the backend process works, it could potentionally help me avoid pitfalls like penalties.
How does the margin get updated exactly and how often do they update it? I only have a vague idea of it. Like I know what the formula is and I have studied that part of the process but how does it get implemented is what I am asking. I am mainly talking about FNO by the way. It’d be really helpful if someone could accurately explain this stuff to me.
best source to get information is by checking on nse website… their website will usually have most of the information… also doing google search will help you as well…
Kinda forgot about this thread but I am still confused about how the margin requirements are updated. Let me just put up an example to illustrate what I am asking.
So, let’s just say I bought a futures contract at the price Rs.100 and the lot size is 10000 with a margin requirement of 3 lakhs. Now, let’s just say the price goes down to Rs.99 and I am making a potential loss of
Rs.10000. Do I need to bring in the unrealised loss immediately? Or is it like the market has to close for the day and then I have to pay for whatever loss I would have at the time of closing?
This is one thing that I wanted to ask. The other thing I am confused about is the whole updating of margins by the exchange four times a day? What exactly is that? I have seen it get mentioned on this forum a couple times. Can someone please elaborate on that as well?
If you’re making a loss, this will be actively debited from your available margin. If you don’t have sufficient margins, your account will result in negative balance. For which you’ll receive margin call to add funds.
Ok, but isn’t that counterintuitive? Cause if the required margin is 3 lakhs, then I should be required to pay that much only. You are saying that even a small unrealized loss during the day will end up in a margin call and my position would be liquidated. It’s understandable if the loss was incurred at the time of closing and then due to insufficient funds the position was closed on the next day. That’s how MTM is supposed to work, isn’t it? Cause if the losses are being deducted in real time, then one can’t hold a position in the first place.
Margin is combination of span+exposure, can check about span here. Exposure is extra level safety followed in India and it is just a percent of contract value so it is straight forward.
In simple terms span uses volatility and pre defined movement to calculate the worst loss a portfolio can face for 1 day with 99.7% probability. So, span is calculated during the trading hours also hence margins can change and need to apply new files accordingly.
Yeah, so better to have 10% in free cash so that it can act as buffer. Also position may not be liquidated if one crosses by under under 5% immediately during the day but better not to get alert in the first place.
But how can M2M occur in real time? It can’t be a thing. Cause M2M is fundamentally based on daily settled prices. How can losses be asked to be paid if they have not been realized by the client in the first place. Cause one moment you could be making a loss and then the next you might be in profit. It’s just not a sure thing. Only realised losses are taken into account for M2M cause that’s a uniform way of doing things. Isn’t asking for losses as they occur highly detrimental for the client cause they risk losing their position any time? Also I know for a fact that an MPOR of 2 days is taken into account while stipulating margins which by itself means that any loss occurred for the day is deducted only after the market closes and if the client is unable to pay up, their position is liquidated on the next day. Hence, 2 days of risk for the margin.
This is same across the globe, your logic of MTM won’t work for leveraged trades, if one don’t want position to have daily M2M then one can buy equity with full money or buy options, futures/option shorts are a leveraged contracts and user is not paying in full, but just a part of contract and there can be chance that there may be loss from the time trade is initiated, one can loose more than he paid as it is leveraged trade so it is mandatory to have enough margin to carry position for next day, imagine if position is carried without span margin and next day it opened 10% against your direction? not only you but broker also loose money in these rare cases. So, to have stable system it is required to have proper risk controls in place.
That’s what I am saying. That M2M is supposed to be daily not every minute. I read through available information through Google and everywhere it says M2M happens after the market closes and before the opening of the next session. Like if I take a futures position and I have paid all the required margin upfront and at 12pm on the same day, I am making a loss of Rs 10000, then no money should get deducted because it is an unrealized loss. Only and only if the market closes on the same day and I still had a loss of Rs 10000, then it is a realised loss. Then, the broker will deduct Rs 10000 from my remaining cash and give it to the exchange. If I don’t have Rs 10000 in my account to pay to the exchange, then on the next day I will get a margin call from the broker and my position will be liquidated. That’s how it is I believe.
That maybe in old times but now all systems/brokers were online and have live risk management and marking to market is done in live basis. As said earlier this is how it will be and I suggest to have 10% additional cash as buffer.
OK. But one last question. Does this real time deduction of losses has something to do with the new upfront margin rule? Cause I am kinda making the connection here that SEBI is asking for Mtm losses as well on upfront basis.
OK, what if I was initially at a loss of let’s say 10000 and that gets deducted on a live basis and then I was in profit? So, do I get that 10000 back in my free cash immediately or is it gone for the rest of the day?
Also, one more thing. Let’s just say I don’t have free cash in my account. Till what threshold can I hold the position without triggering a margin call. Cause I was reading through the FAQs on your webpage and it says that a margin call will be triggered once you have burned through 50% your deposited margin. That’s like 1.5 lakhs of loss I have to incur on 3 lakhs of deposited margin until a margin call should get triggered. So, does that still hold true or not?
