NSE Circular: Updated margin penalty guidelines

Circulars
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Since August 2022, the margin penalty can be passed on to the clients only in case of a shortfall in non-upfront margin requirements. Non-upfront margin pertains to the margins that should be fulfilled by the client after initiating a trade, following the fulfillment of the upfront margin requirement. If the client fails to provide the required funds within the deadline, it leads to a deficit and may result in a penalty.

A shortfall in non-upfront margins can occur due to mark-to-market loss, delivery margin—which exchanges charge on Long ITM stock options from 4 days before expiry, or any additional margin shortfall in case of equity. You can learn more about this here.

However, in case of a shortfall in upfront margin requirements, brokers weren’t allowed to pass on the penalty to the clients. Upfront margin refers to the margin that must be provided in order to initiate a trade.

NSE recently released a circular that allows brokers to pass on penalties to clients in case of margin shortfalls or non-collection of upfront margins under the following scenarios:

  1. In case the check issued by the client is dishonored.
  2. Increase in margins due to changes in client’s hedge positions or expiration of one or more legs of the hedge.

So starting November 1, 2024, if there is any upfront margin shortfall that includes these two scenarios, a client will have to pay a margin penalty in such cases.

For example, if you have issued a cheque to the broker for Rs. 5 lakhs, following which Rs. 5 lakhs have been credited to your account which can be used for trading. However, in case the cheque is dishonored or not accepted by the issuer’s bank, the funds will not reach the broker’s bank account and the broker debits the credited amount to your trading account leading to margin shortfall and subsequent margin penalty.

Another scenario where a penalty will be applicable is if there are changes in hedged positions or the legs of the hedge expire.

For example, say you have a Rs. 100,000 margin in your account and take a short position in the Nifty 25000 Call option with a margin requirement of Rs. 90,000, and to hedge this position, you buy Nifty 26000 Call. Since you also get a margin benefit for the hedged position, your margin will reduce to Rs. 50,000.

Now if you used the remaining Rs. 50,000 to buy shares and later on exit the hedge ie. Nifty 26000 Call, your margin requirement for the short position in Nifty 25000 Call will increase to Rs. 90,000, since you have only Rs. 50,000 margins in your account, there will be a margin penalty applicable for the shortfall of Rs. 40,000.

How to avoid this?

  1. When exiting your positions, always ensure you first square off the positions with higher margin requirements—such as short option and long and short futures positions and then exit the hedge (long option position).

  2. In case of the expiry of the hedged leg, ensure to maintain sufficient funds in your trading account.

  3. Whenever you get an SMS or email about a margin shortfall, add funds immediately to avoid any penalty.

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@Jyoti_P_Deshpande why the rules are changing month on month -
those SEBI and NSE idiots are not forecasting the pros and cons - so only lot of confusion in Indian market

In USA 12 years back one regulation came - after 12 years also there is no new regulation came, that’s a market

now a days are irritated seeing a SEBI logo

India is a corrupted country - NSE chief and SEBI chief also corrupted one -
Thief are teaching a lesson Month on month - its a big joke

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Again? Seriously? :frowning:

Does this (Point 2) include margin changes due to the SPAN margin update? Are you (Zerodha) updating SPAN margin 5 times a day now and transparently posting it every time during market hour as and when published by the exchange? The last I heard back in 2023 was that the peak margin penalty was considered on BoD next day basis - which was fine. Are there any changes to that accord?

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I’d posted the circular & asked something similar earlier a month back.

I sometimes receive post-market Peak Margin shortfall emails, even though there’s no hedge involved for my positions. I was told that it wouldn’t be passed on to the client.

Guess it’s something I’ll find out today, because I’d received one on 4th last week, and today is the T+6 day, so if there’s one, today is the day it should be posted on the ledger.

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Ok. That’s reassuring.

Yeah. I think the main issue with the earlier “Peak Margin Shortfall Penalty” was that during market hours SPAN file was not updated which essentially allowed a client to go overboard on intraday basis. So as a client one was not having a perfect view of the margin requirements (because they saw margin available and in +ve under Funds) and then they used to get surprised at end of the day knowing that PEAK margin penalty was applied at a random time when you were a breach.

So now with upfront margin penalties being passed on to clients, my question is -

  1. When is this shortfall checked - 5 times randomly on intraday basis or on next BoD basis?
  2. Also, I think SPAN still has a role to play. How will you determine if the shortfall is because of breaking of hedge or due to increase in SPAN margin. Just for knowledge, is Zerodha updating SPAN 5 times a day or only at end of the day?

@VenuMadhav

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Exactly my concern as well…

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Because of this variance in margin due to change in SPAN values, SEBI amended the rule and said that for the sake of calculating margin penalty, the beginning of day (BoD) parameters would be applied and margin would be calculated. Even end of day margins today, are calculated based on BoD parameters.

5 4 random snapshots are taken, margin as per BoD parameters is applied on the portfolio when the snapshot is taken, highest of the 5 margin requirements is required to be maintained by the client to fulfill peak margin requirements.

We have an internal tool to track hedge break, we figure the time at which the hedge is broken, correlate it with the peak snapshot and if it matches, apply the penalty.

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Yup … I remember …

Ok. So it is still BoD. Thats better …

Got it. But feels like this is again going in the same direction - like opening a can of worms. The wording has many loose ends. Remember - peak margin shortfall penalty, the confusion, passing it on to the clients, exchanges asking reversal, etc.

My 2 cents -

  1. If you have a tool to track hedge break - please integrate it with nudge and inform the client about potential shortfall before they are about to execute an order that is going to break the hedge and lead to upfront margin shortfall penalty. You can save a lot of penalty on-behalf of your clients.
  2. Get more clarification from SEBI/Exchange - this sounds a little vague and open to individual broker interpretation. I trust Zerodha, but seems every broker will come up with their own set of rules and tools to determine such correlation with no consistency. It is better to be transparent and consistent now rather than go through messy reversals 1.5 years down the line.
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Agree. @VenuMadhav - alongwith this nudge, you should also run a countdown timer on the top banner on page [which you already use to communicate stuff to the user regularly] showing the time left to exit other leg of the position [which the user did not exit] post which the penalty will be applicable.

This aside, I wonder if one day you apply this penalty to me, how would I even come to know about any penalty being applied? And if one doesn’t even come to know about this, they could just keep repeating their workflow without any clue.

p.s., I do create a lot of positions so that I don’t have time to check the contract notes or other stuff you send in emails.

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This is a post trade check, run once we receive files from the stock exchange. For now, notifying this on Kite wouldn’t be possible. We’re working on something, will need time for it to be implemented. Will post an update.

Penalty is subject to one leg of the position being exit as a result of which margins get increased & the Clearing corps taking a snapshot. I’m not sure what timer you’re referring to. Peak snapshots are random, the time at which they’re taken is not made known.

Penalty entry will be posted on the ledger as a separate line item.