Peak margin requirements from Sep 1st 2021 & its effects

Trading Announcements
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Starting Sep 1, 2021, there won’t be any additional intraday leverage for equity (maximum 5 times) and F&O trades. This regulation is going to affect intraday traders. Since intraday traders generate the maximum volumes and revenues, this will affect the entire brokerage industry significantly as well.

Firstly, what is the regulation?

I had explained this earlier, do check this post for details.

Here’s the gist: Until now, brokerage firms could offer any amount of intraday leverage, and now we cannot. Starting Dec 1, there is a maximum intraday leverage that can be offered. Also, this maximum intraday leverage will keep going down from Dec 1, 2020, to Aug 31, 2021. And from today Sep 1, 2021, the maximum intraday leverage will be equal to the SPAN+Exposure margin for F&O (Equity, commodity, currency) and VAR+ELM(with a maximum 20%) for stocks.

What is SPAN+Exposure & VAR+ELM?

This is the minimum margin that exchanges ask brokers to collect from the clients on an end of the day basis for any open position today. If this margin is not collected, there is a penalty on whatever margin was collected short also called the short margin penalty. This penalty can be in the range of 0.5% to 5% of the shortfall per day.

  • Here is the VAR+ELM margin for stocks.
  • Here is the SPAN+Exposure margin for futures.
  • Here is the link to our margin calculator where you can check the SPAN+Exposure for all F&O contracts (Equity, Commodity, Currency)

What changes post peak margin penalty?

Since margin reporting was happening only on an end of the day basis until now, brokerage firms were allowing customers to take intraday positions with margins far lesser than VAR+ELM or SPAN+Exposure. But these additional intraday leverages offered through products like MIS, BO, CO, etc. would forcibly be squared off before the close of trading hours, ensuring there is no margin penalty on the end of the day open positions.

For example,

  • If Reliance VAR+ELM is 20%. Instead of asking Rs 20,000 for a Rs 1L Reliance intraday trade (MIS, CO, BO), some brokers would ask for only 5% or Rs 5,000.
  • If Nifty futures require SPAN+Exposure of Rs 1.5L, brokers would allow customers to trade intraday with say just 30% of this amount or Rs 50,000.

The issue here is that when a broker collects a lesser margin than the minimum, the broker is taking additional risk. These margins are collected to protect the broker from client defaults. For example, if a broker allows a customer to trade for Rs 1L with only Rs 1000 or 1%, if the stock moves say 10% instantly, the customer loses Rs 1000, but the broker loses Rs 9000 (until the broker is able to recover the money from the customer). Competition forced some brokers to attract clients by offering excessive intraday leverages (50 to 100 times). This caught the attention of the regulator, especially after the issues at Karvy, BMA, etc.

So, to fix this for good, SEBI has introduced the concept of peak margin penalty. Similar to how a margin penalty is calculated if the margin collection is lesser than the minimum for the end of the day position, the same logic will now be used to calculate margin penalty if the available margin is lesser than the minimum SPAN+Exposure (Equity, Commodity, Currency) or VAR+ELM margin at any point during the trading day (intraday).

But since this practice of additional intraday leverages has been there for many decades, SEBI has given enough time for the industry to adjust. The circular was put out in Aug 2020 and from Dec 2020 to Sep 2021 the restriction will be slowly increased.

  • Dec 2020 to Feb 2021 — penalty if margin blocked is less than 25% of the minimum 20% of trade value (VAR+ELM) for stocks or SPAN+Exposure for F&O.
  • March 2021 to May 2021 — penalty if margin blocked less than 50% of the minimum margin required.
  • June 2021 to Aug 2021 — penalty if margin blocked less than 75% of the minimum margin required.
  • From Sept 2021 — penalty if margin blocked less than 100% of the minimum margin required.

The minimum margin as I said earlier is VAR+ELM for stocks and SPAN +Exposure for F&O. This minimum margin inherently has leverage, but there can’t be any additional leverage over and above this.

How does it affect us & the Broking industry?

Check this post

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I think you are very supportive about this peak margin. I think it benefits zerodha. Why sounding concern now…

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@nithin Dont you think this is a ploy by large brokers and banks ,whose business has been severely impacted due to zerodha. And they intended to hurt zerodha, as intraday trades seems to be the biggest source of revenue for zerodha

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No basis to come to that conclusion, infact those big banks got effected more than us as few used to offer 100 to 400 times leverage.

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hi @nithin @siva and other zerodha clients,

can you please put your viewpoints about absence of intraday-peak margin penalty as mentioned in this video with supporting circulars from SEBI

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Just goes to show how poorly these regulations have been framed, same pattern as some other rules. some of which may have reasonable ideas but implemented in really ham fisted ways.

Hopefully, new SEBI chairman will correct some of this shit.

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Through the issuance of the circular on collection of upfront margins from SEBI ( PDF ) dated July 20, 2020, SEBI prescribed the norms for the collection of upfront margins and introduced the concept of peak margins.

The idea behind introducing peak margins was to curb the immoderate leverage being provided by some brokers, putting the entire market at risk. Since earlier, margins were only calculated on End Of Day (EOD) positions, brokers gave excess amounts of leverage intraday and allowed clients to take positions, mandating them to close positions before EOD.

To curtail this excess leverage, SEBI required the clearing corporations to start taking snapshots of intraday positions at least 4 times a day and calculate margins on such intraday positions. Here’s an excerpt of the same from the SEBI circular:

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As such, today, the clearing corporation takes 4 snapshots at random intervals on the basis of positions held by the clients. At the end of the day, the broker is required to report available margins against the highest margin value across the 4 files and any shortfall in margin is liable for penalty. This is detailed in the circular here:

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While the intent of the market regulator is unquestionable, the manner in which the circular has been deployed is not without flaws. Zerodha does not provide any excess leverage to clients, and always stipulates the collection of upfront margins when clients are taking positions. However, there are circumstances where the margins shoot up after clients have entered into positions, resulting in a shortfall. There is no way for a broker to control/know the margins charged by the Exchange in advance. Here are examples:

  • Increase in margins consequent to import of latest SPAN file

SPAN files (files on the basis of which margins are calculated) are updated by the exchanges multiple times a day, on the basis of which the margins for client positions change. The possibility hence arises wherein a client could have brought in, sufficient margins at the time of entering into an intraday position, only to realize subsequently that the upfront margin requirements have increased, after the import of the latest SPAN file.

In the event that the peak margin snapshot is taken at this instance after the import of the latest SPAN file, the peak margins in the client’s account may be much higher, leading to an unnecessary peak margin penalty being levied. It is thus difficult to estimate the exact quantum of margins required at any time even for trading members, leading to uncertainty and levy of unnecessary penalties.

  • Increase in margins after EOD upon expiry of weekly contracts

As you are aware, there are weekly option contracts available for various indices: BANK NIFTY, NIFTY, and FINNIFTY. There are often instances where a client may have a hedged position, holding one leg in a weekly contract and another leg in a monthly contract. On expiry day, in the event that a client does not square off the weekly contract (expiring that day), the margins shoot up after market close. Margins are lower for the hedged position until 3:30 PM, and shoot up thereafter.

This causes a great deal of inconvenience, with the exchanges often levying unnecessary penalties due to the margin shortfall in the end of day file. The fact that such a shortfall is likely to occur may not immediately be apparent to a client either.

  • Peak margins due to lag in closing both legs of hedged position

This example is in continuation of the above point. After implementation of the peak margin framework, it is possible for a penalty to be levied despite a client having closed both legs of a hedged trade. This can happen in case the peak margin snapshot is taken at a time when one leg of the trade is closed and the other is yet to be closed.

Example Scenario

  1. The Client transfers ₹2,00,000/- to the trading account to trade in the F&O segment
  1. Client takes a NIFTY long position in April contract - margin blocked is ₹1,60,000/-
  1. Client takes a NIFTY short position in May contract - margin blocked is now ₹30,000/- (on account of the position now being hedged; free balance in account: ₹1,70,000/-)
  1. Client takes a BANKNIFTY long position in April contract - margin blocked ₹1,60,000/-
  1. In this case, the Client has fulfilled all margin requirements.
  1. Client now closes the first leg of the NIFTY position (long April), as a result of which the total margin required in the account goes up to: ₹3,20,000/-
  1. Trading member system raises an alert and informs the client of short margins
  1. NSE takes a snapshot of the position at this instance and captures ₹3,20,000/- as margin required
  1. Client on receipt of alert from the trading member closes the other leg of NIFTY, as a result of which the margin required drops to ₹1,60,000/- (Since only the BANKNIFTY position is open)

In this example too, an unnecessary penalty gets levied for being short on peak margins, despite the client having squared up the outstanding positions and complying with the margin requirements on an end of day basis.

All brokers are subject to audits by internal auditors, concurrent auditors, inspections by stock exchanges - both onsite and offsite, inspection by market regulator SEBI. As such, it is unlikely that a broker is making money by posting entries on the client’s ledger in the garb of “margin penalty”.

These matters have already been escalated to the respected regulator and are under consideration. Very soon, there will be changes made to the manner of implementation of the peak margin rules after which there will possibly be a reduction in the penalty values being imposed by the Stock Exchange.

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hi @ShubhS9 , really appreciate your efforts in explaining this in detail.
Your efforts may be worthwhile, if the same can be available in zerodha websites under standard FAQ section with an appropriate title.
Thanks!

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This is available on Support Portal as well.

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The main allegation in the video is that the SEBI Circular on intraday peak margin, levies penalties on members (brokers) for non-collection or short-collection of margins from clients and that these penalties cannot be passed on to clients.
I know this sounds unfair on the brokers but this is what is alleged in the video by PR Sundar, with references provided to SEBI circulars and email responses.

Now that the video has gone viral and many investors are emailing SEBI, I hope SEBI will provide clarity on this issue soon.

1 Like
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I read in one of the articles that no penalty is imposed if funds turn negative due to intra day volatility.
For example.
Lets say I have utlised funds of 9lakhs and addtional 1lakh is kept in the account. Due to intra day volatility margin has increased and now funds available shows negative 1lakh. Will there be penalty?
The last I have read, there was penalty. Has anything changed since then?
@ShubhS9

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Relaxed from from 1st August, 2022.

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This comes into effect from August 1st, 2022. From then onwards margin at the beginning of the day will be considered for reporting. So if there is any shortfall due to intraday spike, there won’t be margin penalty. You can check the SEBI circular here: https://www.sebi.gov.in/legal/circulars/may-2022/changes-to-the-framework-to-enable-verification-of-upfront-collection-of-margins-from-clients-in-cash-and-derivatives-segments_58843.html

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Thank you for the clarification. So from what I understand we would have only short margin penalty.
There would be no peak margin penalty.
So on intra day basis brokers can give addtional leverage. I feel I am still missing out on something. Would you mind explaining how is it different from what it was before peak margin was introduced?

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No more than margin required at beginning of the day.

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Okay so let me try to understand this using few scenarios

Magin utlised in the morning: 9lakhs
Funds available: 1lakh
No new positions taken during he day
During the day total margjn required goes to 11lakhs.
Shortfall 1lakh.
Result: No margin penalty.

No open positons
Cash available 10lakhs
When I take position margin required 9lakhs.
For the same positions if they were open before the start ot trading session was 11lakhs
After the positions were taken margin increased to 12lakhs
Shortfall 2lakhs
Result: peak margin penalty on 2 lakhs.

No open positons
Cash available 10lakhs
When I take position margin required 9lakhs.
For the same positions if they were open before the start ot trading session was 11lakhs
After the positions were taken margin dropped to 8lakhs
Shortfall NIL
Result: No Penalty.

No open positons
Cash available 10lakhs
When I take position margin required 9lakhs.
For the same positions if they were open before the start ot trading session was 11lakhs
After the positions were taken margin increased to 10.5lakhs
Shortfall 50k
Result: peak margin penalty on 50k

Can you clarify if my understanding is right. If this is right then I will understand combination of open and new positions also.

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Going through all the material below , Peak margin penalty transferring to Client is not legit . Its only EOD margin can be liable for penalty . “The client needs to fund their account before 11.59 PM to avoid paying the peak margin penalty”. Its clearly mention in RTIs and cases that Brokers should give sufficient time and constant communications or even RMS should square off . Many brokers are levying random penalties without any proof is a ‘Day light Robbery’

  1. Another SCAM by Brokers (I was charged ₹9.5 LAKHS) + Post Market Report 01-Apr - YouTube
  2. TRUTH Behind 50% Cash Margin & Peak Margin Penalty - BROKER SCAM Part 2 - YouTube
    Information related to Peak margin Penalty: 1. TRUTH Behind 50% Cash Margin & Peak Margin Penalty - BROKER SCAM Part 2 - YouTube ( watch from: 4:33 to 13:04) , 2. FAQ: https://www1.nseindia.com/membership/resources/download/faq_mrg_collection_reporting.pdf 3.SEBI Cases against broker: https://www.sebi.gov.in/enforcement/orders/dec-2021/appeal-no-4529-of-2021-filed-by-gowrishankar-s_54616.html,https://www.sebi.gov.in/sebi_data/attachdocs/dec-2017/1514550695322.pdf

I even don’t understand what SEBI wants, they have finished intraday margins then why they have 4 times a day margin updates that too randomly. Now they will remove it on 1st Aug. So even removing some clause takes 3- 4 months !!!

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@ShubhS9 why is there a 146340 rupee difference in margin requirement between zerodha and kotak ?

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Zerodha have started blocking 3-4% extra, so probably Kotak is only blocking the mandated margin, or not blocking extra upto the extent Zerodha is doing…

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Hi @viswaram, apologies for delayed response. As @SachinSingh pointed out, we block 3-4% additional margin. You can refer to this post for more information.