No additional intraday leverages from Aug 2021 in Indian capital markets

Industry Insights
1

SEBI has just put a clarification on the issue around additional intraday leverages offered by all brokerage firms in India. While they have reiterated that all margins have to be collected before a trade, they have put in a framework and a phased adoption for penalizing non-collection of full margins. So intraday products that offer additional leverage over and above SPAN+Exposure for F&O or VAR+ELM for stocks, will have to stop completely by Aug 2021. Here is the circular.

Check this thread to better understand the context

So what does it mean?

Equity

From Aug 1, 2020, brokers are mandated to collect margins (VAR+ELM) even for trading stocks, similar to SPAN + Exposure for F&O. If the entire VAR+ELM is not collected before entering a stock trade (similar to SPAN +Exposure for F&O), the brokerage firm is not following the spirit of the regulation which requires this to be collected upfront before a trade. Here is the VAR+ELM margin requirement for stocks currently.

So if Reliance has VAR+ELM of 22%, this means that to trade Rs 1,00,000 of Reliance, minimum Rs 22,000 has to be collected. This works to leverage of around 4.5 times. But today the intraday leverages offered on Reliance is up to 20 times or just 5% of the trade value (50% of VAR+ELM for MIS product and 25% of VAR+ELM for CO/BO). There are aggressive brokerage firms that offer much higher (some brokers asking only 1% margin or 100 times leverage).

While all brokers will have to collect this VAR+ELM compulsory before a trade even now, penalties for non-collection will kick in from Dec 2020 in a phased manner.

Dec 2020- Feb 2021: Penalty if margin used <25% of VAR+ELM
Mar 2021- May 2021: Penalty if margin used <50% of VAR+ELM
June 2021- Aug 2021: Penalty if margin used <75% of VAR+ELM
Aug 2021 onwards: Penalty if margin used < VAR+ELM

So post Aug intraday leverage when trading stocks will be only to the extent of VAR+ELM. No additional leverage over and above that.

F&O (Equity, Index, Commodity, Currency)

Similarly in F&O, the SPAN+Exposure margin has to be collected upfront for all futures and short options trades, before a trade. You can check this to see the SPAN+Exposure requirement for all F&O contracts.

So post-Aug intraday leverage when trading F&O will be only to the extent of SPAN+Exposure. This means the margin required for both overnight and intraday positions will be the same. So MIS (requires 40% of SPAN+Exposure) and CO (25% of SPAN+Exposure) will also have to collect full SPAN+Exposure like NRML product type.

So yeah, this regulation around intraday leverages is now no more grey, it is black and white now.

For more context:

https://twitter.com/CNBCTV18News/status/1285476192137641989?s=20

https://twitter.com/CNBCTV18News/status/1285476306377940992?s=20

18 Likes
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Will there be any change to leverage in Index option selling? @nithin

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does this mean intraday leverage will remain same till nov 20 and then start reducing after december and finally become zero in august 21 ? @nithin @siva-reddy

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Index option selling requires SPAN+Exposure. So the above is applicable for Option writing as well.

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I think so.

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What effects will it have on the volumes in the market? Any thoughts @nithin

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If i’m understanding it correctly, there always will be that 4.5 times margin for intraday right? coz instead of 5-10k, we have to maintain 22k as per example given to take the trade without getting into penalty trouble. Same goes for all the trades weather it’s Equity or FnO. Like in Equity we have Span + Exposure, same will be applicable for Equity as Var + ELM.

and that 22% is the 100% VAR + ELM. so for the time being, till december, we have to maintain 25% of VAR + ELM that means for Reliance 22% is the Full VAR + ELM so it comes down to minimum 5.5% VAR + ELM till feb 2021 and by the Aug 2021, we’ve to keep full 100% VAR + ELM so it’s 22% at max as per example.

So intraday leverage isn’t completely gone but restricted to a limit so that we’ll always have to pay full VAR + ELM.

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Right, also it varies to each scrip based on it’s var+elm.

Not for FNO as var +elm is only for eq, where as span+exposure comes into picture for fno.

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SEBI is doing this transition in a phased manner. I am guessing, markets will adjust. But yeah, will reduce the volumes for sure.

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Yeah sorry, so just like it’s for FnO right now, Same is going to be applicable in Equity in Phased manner. It has nothing to do with Intraday Leverage provided on Zerodha as you’re already providing decent margins unlike 10x/20x what you’re providing is already good enough and not so excessive. so not much difference in any segment as a Zerodha user right?

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There will be an effect right?

Today for MIS we ask for 50% of VAR+ELM or 25% of VAR+ELM for CO. So for Reliance you would be getting 9 to 18 times leverage, by the time this is implemented, you will get 4.5 times for any intraday product type.

Similarly for F&O, we asking 40% of SPAN+Exposure for MIS and 25% for CO. This will go away and minimum SPAN+Exposure will be required for all product types.

But the effect will be lesser compared to some of our competition who offer much higher leverages than us.

2 Likes
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So considering your Reliance example,.it means… Aug 2021 onwards we must have 22000 in trading account to trade 1L of Reliance shares… Is it right? Or we must have 1L rupees to trade Reliance?? Pls Reply

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16

Rs 22,000.

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right, understood. For Equity leverage will be limited to stock specific VAR + ELM margins. that’s reduced by a lot but still there’s leverage.

That means FnO margins are gone completely after Aug 2021, as we’ll require Full Margins as NRML is right now and for equity, margins will be as per VAR + ELM.

So basically FnO margin is 100% gone by the Aug 2021?

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Any chance of intraday leverage for FnO to continue if the margin is funded by brokers own capital like you mentioned in earlier posts

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so in short, we can get leverage max upto 4.5 & things ll still continue as such.?

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No, it’s 100% VAR + ELM which is 22% right now so you’ll need 22000 INR to trade in INTRADAY for Reliance Equity Stock.

not sure about what’s happening to FnO. it’ll be Full SPAN + EXPOSURE i think so right now we can trade Reliance future for around 80K for intraday, it’ll be 2.8L as per current prices so no Leverage in Future and Options.

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That intraday leverage that can be offered until Aug 2021 from Dec 2020 is only from brokers own capital. But post that, no.

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Yeah, you are right.

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margins used and fund of the Trading members will be cross checked so i dont’ think brokers can use their own funds for us anymore…