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.

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I’m noticing that more margin is being blocked at EOD as per Margin Statement, though it appears fine on Kite the next day.

@VenuMadhav, wanted to know what has changed regarding the way EOD margin is calculated from 13th onwards? For 13th & 14th, I actually have two different Margin Statements. For 13th, the Margin Statement received through email & for 14th, the one I’d downloaded through Console that particular day, both show different EOD value to the one if I were to download it through Console today.

This particular thing of there being two separate Margin Statements seems to have been fixed from yesterday onwards, but definitely showed more margin being blocked at EOD.

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@nithin, please check this:

For 13th November, I’m posting the two EOD Margin figures from one Zerodha account. This issue is there for other dates & other accounts too.

email
email1920Ă—1773 145 KB

The above is from the Margin Statement I’d received on email. Can forward it if you wish.

Console
Console500Ă—674 40.3 KB

The above is the Margin Statement one would get by downloading it from Console right now.

It’d be very wrong for you to take any sort of EOD short margin penalty on this (or other places), as on my part, I’d left plenty of EOD margin (+19L), which is roughly the same what was there on Kite the next day (14th Nov) as well. But for whatever reason, now if you download, it’s showing -1.41L.

More importantly, as I take overnight positions, I’d like some clarity as to how the EOD margin is being calculated right now on Zerodha.

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Hey @SachinSingh

Before I begin to answer your specific question. Here is the brief about changes we did w.r.t EOD margin effective Nov 14th.

The NSE publishes two margin values for clients’ end-of-day (EOD) positions: the beginning-of-day (BOD) span margin parameters and the EOD span margin parameters. The BOD margin is primarily used for margin reporting and allocation, with EOD penalties being calculated based on these values. In contrast, the EOD margin reflects the actual margin charged for open positions at the end of the day. EOD margins may be higher than BOD margins due to increased volatility but can also be lower with decreased volatility.

Here is the full explanation of both of these margins.

On Kite, we show BOD margins so that margin collection for the trade follows the exchange reporting and no penalties are levied.

Before November 14th, we blocked margin values on the ledger and margin statement based on the EOD span parameter released by the exchange. However, when BOD margins exceeded EOD margins, it led to a shortfall in upfront margins and penalties if the client took payouts of freed funds. This issue could have been avoided by retaining BOD margins before processing payouts.

Just to illustrate this with an example:

Say Customer A holds a Nifty Future position, with the following margins:

BOD file Margins:

Span: 75K
Exposure: 30K
Total: 105K
Margin Available: 110K, leaving Free Funds of 5K

EOD (actual) Margins:

Span: 72K
Exposure: 28K
Total: 100K

Margin Available: 110K, leaving Free Funds of 10K

For margin collection and reporting, the BOD margin of 105K is considered. Previously, we charged 100K in the ledger and margin statement, which left 10K available for the client to withdraw, potentially causing a shortfall and penalty in reported margins for EOD positions.

To address this, we now charge the higher of the BOD and EOD margins on the client ledger and in margin statements. So, in the new system, it will show the EOD margin required as 105K.

Since we updated the system for displaying new margin values in margin statements, any margin statement generated for older dates on the Console will now reflect margins based on the new system.

Does this affect your trading the next day?

The answer is NO. Kite will show margins based on the actual margins charged for your positions.

We’ll check the feasibility of showing both margins to the clients, as it may help them understand the change in margin from BOD to EOD, and we will also create a support article explaining this.

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Thanks @Sanjukumar.K

a) Taking my own example here, the 19L remaning at EOD are the actual funds remaining in the account after market close but the margin which shows -1.4L as remaining at EOD is the one being reported to the exchanges (so that if I make a payout, upfront margin doesn’t go into negative)?

b) Assuming I’m understanding correctly, since the account isn’t actually in negative balance at EOD, there would be no EOD margin penalty or Delayed Payment charges passed on to the client?

c) This new system would make it very tricky to make withdrawals. In the above example, on my part, I’ve left 19L at EOD but if I wanted to make a withdrawal, I can’t do it. The worst part is that it’s something I’ve no control over.

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In this case, the system does not allow you to withdraw 19L because it blocks the higher BOD margin, which is also the margin reported to the exchange. If the available margin in your account is less than the required BOD margin, it results in a shortfall.

There will be an EOD penalty on the shortfall of 1.4L if this shortfall is due to a hedge break. Otherwise, the broker will bear the penalty. However, no delayed payment charges will be applied in this case. Please DM me your Client ID, and I will check and confirm this for you.

As explained, we are required to report margins to the exchange based on the BOD values. Even if the margins are reduced by EOD, we must still report them as per the BOD. Failing to do so would lead to a penalty.