Sharing something we had written for internal use. I will put a detailed blog on this. Circular is applicable for both cash and FO. But in cash there is never any margin penalty issue as the margin is a fixed 20% for intraday and for overnight anyways full money is collected.
What are the examples of upfront penalty?
We do not allow clients to enter positions without upfront margins collected. However, there are instances where the upfront margin required increases intraday due to the following,
- Increase in margin requirement due to shuffling of positions.
F&O margin requirements are based on SPAN and Exposure margins. SPAN margin is calculated on the entire portfolio of F&O positions held. Some trade positions that reduce the risk of a portfolio lead to lesser margin requirements. The margin requirement may shoot up if you exit such positions without closing other open trades.
For example, if a client holds Nifty futures and Nifty puts, the margin drops to X. If you withdraw that money and the client has only X left, and you exit puts, the margin for Nifty futures now increases to Y. Leading to a short margin and a penalty for the broker if a peak margin snapshot is taken or end of day margin penalty for the customer if the customer doesn’t square off (it is either peak or EOD penalty and not both).- SPAN margins increase
Exchanges publish margin files multiple times during the day; among them, the last final file is published at 5:30 PM, and accordingly, SPAN margins are updated at the End of the Day (EOD) file. If the EOD SPAN margin required value is greater than the available margin, it will result in a shortfall, and the penalty gets charged to the broker. This is explained in detail later.- The other scenario of end-of-day margin increase is when a client is holding a calendar spread hedge contract where margin benefit is available; in such cases, on the expiry day, the current week’s contract expires, and as a result, the unhedged position results in margin increase and shortfall if no additional funds are maintained.
Any penalty due to the above scenarios isn’t passed on to the client from Aug 1st.
What is the time limit to add funds for upfront margin shortfall? And how will the client get to know about upfront shortfall?
The client has time till 11:59 pm on the T-day to add funds for the upfront margin shortfall. Clients can refer to the provisional margin shortfall email or voice message we send for peak margin shortfall. Until Aug 1st, the email and voice blast to customers would ask clients to transfer funds to avoid peak or upfront margin penalty. Since we are not passing this penalty to clients, we have stopped saying it, and we will make it more about increased margins or squaring off of positions (explained more below).
What are examples of the non-upfront penalty, which can be passed on to the customer?
If a client has a shortfall due to the reasons below and doesn’t bring in the funds by the next business day, a non-upfront penalty gets charged and is posted on the client ledger. SEBI allows us to pass on this penalty.
- MTM or marked-to-market losses in futures trade are charged on the same day and will be part of EOD margin requirements.
- Ad-hoc margins can be applied by the exchanges for high-risk category scrips due to increased volatility in addition to SPAN+ Exposure or VAR + ELM. Exchanges share the increased Adhoc margins in the margin file at the end of the day and will be charged as EOD margin requirements.
- Physical delivery margin (in case of FNO) -
- For futures and short positions, margin requirements go up on the expiry day to 40% of contract value or SPAN and Exposure (whichever is higher)
- For long positions, margin requirements start on E-4 days for ITM options,
E-4 Day (Friday) 10% of VaR + ELM +Adhoc margins E-3 Day (Monday) 25% of VaR + ELM +Adhoc margins E-2 Day (Tuesday) 45% of VaR + ELM +Adhoc margins E-1 Day (Wednesday) 50% of the contract value Expiry Day (Thursday) 50% of the contract value Note - If OTM options become ITM on any day, margins are applied per the table above.
If you see any penalty on the client’s ledger after 1st Aug, it’s for these non-upfront margin shortfalls.
What is the time limit to add funds for non-upfront margin shortfall? And how will the client get to know about non-upfront shortfall?
The client has until T+1 to add funds for the non-upfront margin shortfall. Clients can refer to the margin statement to know the non-upfront margin shortfall. Non-upfront Shortfall = (CCO/Adhoc/Delivery margin required - CCO/Adhoc/delivery margin collected).