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:
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:
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
- The Client transfers ₹2,00,000/- to the trading account to trade in the F&O segment
- Client takes a NIFTY long position in April contract - margin blocked is ₹1,60,000/-
- 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/-)
- Client takes a BANKNIFTY long position in April contract - margin blocked ₹1,60,000/-
- In this case, the Client has fulfilled all margin requirements.
- 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/-
- Trading member system raises an alert and informs the client of short margins
- NSE takes a snapshot of the position at this instance and captures ₹3,20,000/- as margin required
- 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.
