NSE Circular on Short margin penalty refund

Can someone explain if this means that any short margin penalty levied since Oct 2021 has to be refunded by the brokers?



We have stopped passing on upfront margin penalties for the last couple of months; we bear the cost now. But yes, the circular asks all upfront penalties collected and paid to exchanges from last October to be refunded. Brokers are representing to take this circular back as there was no way for brokers to comply with this regulation. We will get to know what happens in the next couple of weeks. But no broker can pass this upfront margin penalty anymore; only non-upfront margin penalty is allowed to be passed. Non-upfront for example is when there is a loss and customer doesn’t bring it by next day and hence is short margin, or when there is additional physical margin and customer doesn’t bring in, etc.

I was writing a post on this topic as it is quite a complex topic; give me a couple of days, will share it here.


Good to know that there’s no more upfront margin penalties, so I don’t have to keep a 10% additional margin buffer (which I was forced to do after paying penalties, a couple of times - which randomly appear in the statements with a lot of opaqueness around it).

Point noted on non-upfront margin penalties. Also, thinking selfishly, in case the brokers are representing against the circular, the ask should be to get the refund from the regulator- and not pass the penalties on retail traders. Practically, it wasn’t possible even for traders to constantly track shortfalls and replenish margins. I’ve paid penalties even after maintaining positive eod margins, apparently falling short on peak intraday margin requirements. (Not even mentioning the pain inflicted from auto-square off of positions, and a list of related charges that followed).


It will still be nice to have you keep that 10% additional margin. Remember that your broker still has to pay it from their pocket, even if you are not paying it. :slight_smile: If the brokers bear the cost and this keeps going up, business models might have to change.

What is paid to the exchanges, they won’t refund for sure. Brokers are asking for penalties to be lesser in the future. Some of these penalties aren’t really in the broker’s control either. I am sharing a part of the recent note that I sent to exchanges.

Margins on short option positions

When a customer holds a futures position and has a marked-to-market loss, the customer gets time till the next trading day to fund the losses. There is no margin penalty on the trading day, and a penalty is levied only if the customer doesn’t bring the MTM loss on the next day.

In a short-option position, there is no MTM loss when the market moves against the customer, but the margin required to hold the position goes up. An upfront margin penalty is charged if the customer doesn’t have sufficient margins to hold this position, both for intraday peak and end of the day and on the trading day itself.

So, for example, on Monday, 29th Aug, the beginning of day (BOD) margin to short Banknifty 39000 puts was ~ Rs 1.5lks. As the markets went lower, the margin increased. Both for peak and the end of the day, the margin required was ~ Rs 1.65lks. A penalty was charged since the margin went up.

If we allow until T+1 day to bring in any loss for the futures position, customers who hold short options should also be allowed to fund the increased margins by the next trading day. In terms of risk, short options carry lower risk than futures.

To cover this issue, we charge an additional margin of between 3% and 5% over and above whatever the exchanges ask. It works for most days when markets aren’t trending either up or down, but on days the market moves significantly in one direction, no additional margin is enough to ensure the customer isn’t in a situation where a penalty is levied. For example, on a day like last Monday, we would have had to ask for an additional 15%; on a more volatile day, it could be as much as 50% and over. This is one of those impossible to comply with types of regulation, and I hope something can be done about it.

Hedged positions

The biggest reason for the penalties is when customers who hold a bunch of F&O positions first exit long options that increase the risk of the portfolio, and hence the margins increase post-exit. There is a margin penalty if customers don’t have sufficient free cash post exit of a position.

To solve this problem, the risk management system (RMS) should not allow the exit of any position if the post-exit margin required for the portfolio goes up and if the customer doesn’t have sufficient free funds. Until now, no RMS globally that I know of has the facility to do this check while a customer is exiting positions. This is a complex technological problem, given that this simulating post-exit portfolio margin has to be done in the order path. We are working on launching our in-house RMS with this feature. Even the vendors are trying to build out this feature. But until that happens, which can be upwards of a year or even more for the entire industry, all brokerage firms are like sitting ducks and have no way to avoid this penalty.

I am not requesting any changes to this, as the penalty will force brokers to push for this technological change. But I request you to consider changing how margin penalties are charged today. The short-margin penalty framework was mostly thought for the end-of-the-day margins era, but now the same penalty is being charged on peak margins as well, which potentially, for reasons mentioned above, increases the number of instances almost exponentially.

Margin penalty is 0.5% for shortfall amounts lesser than Rs 1lk and 1% above Rs 1lk. This isn’t too bad. But the penalties(NSE) go up significantly when

  • If short/non-collection of margins for a client continues for more than 3 consecutive days, then penalty of 5% of the shortfall amount shall be levied for each day of continued shortfall beyond the 3rd day of shortfall.
  • If short/non-collection of margins for a client takes place for more than 5 days in a month, then penalty of 5% of the shortfall amount shall be levied for each day, during the month, beyond the 5th day of shortfall.

The above penalty that has to be paid by the broker increases the risk exponentially for the broker. Also, since the penalty has to be paid by the broker, the customer disregards any notification to make sure long options are not exited in hedged positions or if short option positions are going against the customer to bring additional margins on the same day. Well-capitalised brokers like us would have the wherewithal to cover the penalty, but this could get large enough to hurt small and medium brokers, large enough to find loopholes to avoid or fund this, leading to larger issues.


Understood both the points :slight_smile:
And it was really nice of you to take time out on a Sunday and answer the queries.


Is this circular also applied on mcx exchanges. I have been charged penalties there.

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Just a clarification, are you charging 3 - 5% extra margin in FNO segment than required by exchanges, during intraday??

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For anyone still waiting for response on its zerodha support ticket, do yourself a favour and open a ticket at NSE Nice Plus https://investorhelpline.nseindia.com/NICEPLUS/, Had a similar issue where a ticket was opened for more then 3 weeks with no updates and resolved in < 3-4 days once NSE accepted the case.

Also its funny that there was no issue when these penalties were being charged from clients. But now every broker starts challenging the same when it comes to them :face_with_peeking_eye:


Yeah, we are; I think many other brokers have started charging too. If they are not charging, they will have to start soon. The guys who may not be charging are also those who are passing the margin penalty to the customer as of now.

Funny how?

Customers are in control, so they can easily avoid upfront margin penalties. A broker is not in control of what the customer does, especially in the two examples I shared earlier, and that is the issue.

I don’t think it was easy to avoid for retailers too as it required instant changes. As you said, this seems to be impossible to comply with in some cases. 3-5% margin increase, even 10% for me, is fair but even that wont work all the time as you said. But for Hedged positions yes, customer can prevent it by taking care.


At every point when the margin goes up intraday, it would get updated on the platform and customers can add margins (we send a notification when utilisation goes up). If margins go up by end of the day after the market close, we send an email notification asking to add funds before midnight. So even this is in control, except of course if a customer doesn’t have additional funds to add.

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I have not started trading fno yet, so i have not faced this directly. But this was the issue which delayed fno work for me. Even if i could instantly act after getting notification, which would be tiresome as i don’t sit in front of pc always, i still would have breached margin rules for small time and snapshot could have been taken at just that moment leading to penalty i think. Also the whole process was not very transparent based on complaints from people.

Anyway, i hope brokers can work with SEBI and come up with something that works for all. I though BOD margin rule would solve this but it seems it only applies to us but not for brokers, even for unhedged positions.

Is peak margin rule diffrence from upfront margin .

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No. They are similar. Infact one is an outcome of the other. So, both can be considered as one n the same.

Upfront margin is that amount which a trader is supposed to have before taking any particular trade.

If the margin required becomes more than upfront margin after taking a trade due to various reasons, peak margin shortfall happens for which exchange levies penalty.

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In both case can I get my penalties back


Sir is upfront margin penalty and short margin penalty the same? Whats the difference between them. Newbie in markets so please can you clarify? Also is this circular applicable to both Cash equity or only FNO?

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Thanks for explaining a broker’s point of view in detail. Makes perfect sense. I guess, the best way to go forward is to place restrictions.

1.) If the customer wants to exit the hedge position, he needs to buyback first.
2.) If a customer is in loss, and may soon need more margin. Zerodha should first warn the user by notification/email/sms that funds are running low, and please add more margin in order to avoid the risk for your position to get automatically squared off.
3.) Maybe add a feature that allows customers to set “reversed margin”. For example, let’s say, I have 1 crore capital. I want to reserve 2 lakh. Now, I will only be able to buy/sell for 98 lakh, and those 2 lakh will be used only when I am running out of margin. I won’t be directly able to buy/sell using those 2 lakh INR. It will help broker avoid the penalty plus help customers avoid their positions getting automatically squared off.

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Not boasting, but after a few previous trial & errors, now I’ve a fairly good understanding of how much margin should be kept overnight. And this extra 3-4 % roughly translates to 5-6L in my case. Even at a very conservative estimate of 1% per month, not being able to utilize this will set me back by at least 70k.
I think at one point Zerodha used to block only the exchange mandated margin, which I thought was a plus point compared to other brokerages.

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This should have been done even when penalty was borne by clients. Zerodha does protect the retailers in a lot of way. I wish even this was implemented back then.

I had given this suggestion a year back but yet it wasn’t implemented. Now that brokers have to bear it, you are keeping extra margin. If this was done then a lot of client money would have been saved. I know such changes would receive some backlash from few clients but then in the best interest of your clients you have taken bolder steps before.
@nithin I would really appreciate your response on this.