There have been many moving pieces on the topic of upfront margin requirements for trading stocks and F&O, and intraday leverages over the last few weeks. First, the news that clients will not be able to use the proceeds from selling stock holdings to buy other stocks on the same day. Then the clarification via an FAQ from exchanges that allowed this and also a circular from SEBI on July 31 which postponed collection of short margin penalty for delivery stock trades to start from Sept 1, 2020. The SEBI circular also says that the minimum margin requirement for stocks from the client can be 20% of the trade value instead of VAR+ELM provided that the brokerage firm makes up for the difference between this 20% and VAR+ELM from its own capital. If all this seems new to you, make sure to check this post for the background first.
Firstly, all margin requirements will continue to remain the same until September 1, 2020, after which there will be a few small changes, as explained in this post. While you as a customer won’t see any drastic changes, there are going to be some significant back-end changes for us (brokers). The most important of these being debiting shares from your demat on the same day you sell them and making an Early Pay-In (EPI) to the exchange before 7.30 PM instead of how we currently transfer them to the exchange on the next trading day. This EPI is required to be done to ensure that you are not asked for additional margins to sell your stock holdings and also to allow you to buy other stocks from the proceeds of selling your existing stock holdings in the new margin regime for trading stocks.
Sale proceeds from holdings can be used to purchase new stocks
Like how you can currently use stock sold to buy other stocks, the same will continue to be allowed from Sep 1st 2020. By debiting your demat account and doing EPI to the exchanges by 7.30 PM on the same day as explained above, we can allow you to sell your stock holdings without any margins. Also, the stock being EPI can be considered as margin, allowing you to buy more stock from the sale proceeds.
One issue with the 7.30 PM deadline though is that it may not give brokers enough time to move securities from your demat account to exchange. Exchange shares the trade files by 4.30 pm, which has to be first processed, instruction file needs to be created to debit all client demat accounts, the depository has to then process these instructions, all of which can take more than 3 hours. We have requested for an extension of this 7.30 PM deadline; if not provided, we might start debiting stock from your demat account as soon as your delivery sell order gets executed on the exchange during market hours. We will keep you updated on this.
One type of trade which will not be possible is selling stock from your demat and then buying it back before the end of the trading day without any margin in your account. This will most likely be applicable from Dec 1, 2020, when the penalty on peak margin reporting starts — which requires the customer to have sufficient margins at every point during the trading day and not just on an end of day basis. Let me explain with an example:
Assume you have 100 shares of Reliance in your demat and no other money in your trading account. You can sell these shares and use the proceeds to buy back some other stock. What we will do is debit your 100 shares of Reliance and give it to the exchange before 7.30 PM on the same day. Thus, no margins are required for selling, and this value of Reliance shares sold can be used to buy shares of some other company. But assume you sell 100 shares of Reliance at 10.00 AM and then decide to buy back the same stock at 11 AM. The issue now is that at the end of the day, there will be no stock for EPI as this becomes an intraday trade. While there is no position at the end of the day for margin reporting, at 10 AM you would have 100 shares of Reliance short which would require a margin of around Rs 40,000 (20% of 100 x 2000) in the peak margin reporting regime. Since this Rs 40,000 isn’t available as margin, this would entail an upfront margin penalty from Dec 1st 2020. Brokers will not be able to allow you to take such positions even if you wish to, since the penalty from such shortfall cannot be charged to you the client, but has to be borne by the brokerage firm.
Holdings sold can be used to trade F&O
As it is now, you will be able to sell your stock holdings and use the proceeds to enter F&O trades immediately. This is again possible after the clarification from exchanges that Early Payin (EPI) of stocks sold can be considered as margin, both for new stock and F&O trades.
New F&O positions can be taken after exiting existing F&O positions
If you hold futures or short options positions, exiting them frees up the margin blocked. This margin can be then used to trade futures, short + long options, and even stocks. Additionally, you can also sell your existing long options position and use the credit to enter new long options positions without having to pay any margin penalty. However, credit from selling overnight long option positions can’t be used to trade in futures, buy stocks, or write options, but only to enter new options positions until the next trading day.
Intraday profits can’t be used to enter new trades
All realised intraday profits for stock trades get settled on T+2 day. All realised intraday F&O profits and realised Marked to Market (M2M) profit in futures gets settled on T+1 day. So these profits will not be allowed to be used for new positions until settled by the exchanges.
Using proceeds from BTST trades to trade F&O
Only 60% of the value of the stock in BTST trades sold will be available as margin to take new positions in F&O or for buying other stocks. The reason for this is that in BTST there will be no stock to deliver to the exchanges via EPI on the day stock is sold since the stock isn’t credited to your demat yet (Stocks bought get credited on T+2 day). For example, if you bought stocks worth Rs 100 today when you sell it tomorrow, Rs 20 has to be shown as blocked for margin to buy (VAR+ELM or 20%), Rs 20 has to be shown as margin blocked for selling on T+1 or BTST day (VAR+ELM or 20% as stock not available for EPI), and you’re left with Rs 60 that can be used to take new positions. We are waiting for clarifications if there is a way to allow you to use 100% of the proceeds from stocks sold even when it is BTST.
New pledging mechanism
The new pledging mechanism to provide your stock holding as collateral for F&O will be live before Sep 1st 2020. In the new mechanism, unlike before the stocks will continue to remain in your demat account. Check this post for more. All pledges made in the old method will need to be unwound by Sep 1st 2020 and then repledged using the new mechanism. We will send you an email as soon as the new mechanism is up and running.
This circular from SEBI from 31st July says that a minimum of VAR+ELM or 20% of trade value has to be collected from the customer upfront before a trade, even for an intraday trade. Since almost all stocks have VAR+ELM greater than 20%, this essentially means that the maximum intraday leverage that can be provided for stocks is 20% of trade value or 5 times.
Similarly, the circular says that a minimum of SPAN+Exposure has to be collected from the customer upfront before a trade, even if it is an intraday trade.
When is this applicable from?
This SEBI circular says that there will be a penalty if trades are allowed without sufficient VAR+ELM or 20% for stocks, and SPAN+Exposure from Dec 1st 2020 even on an intraday basis.
- Dec 2020 to Feb 2021 - penalty if margin blocked is less than 25% of VAR+ELM ( or 20% of trade value) for stocks or SPAN+Exposure for F&O. (Max leverage of 5% or 20 times for stocks)
- Marc 2021 to May 2021 - penalty if margin blocked less than 50% of minimum margin required. (Max leverage of 10% or 10 times for stocks)
- June 2021 to Aug 2021 - penalty if margin blocked less than 75% of minimum margin required. (Max leverage of 15% or around 7 times for stocks)
- From Sept 2021 - penalty if margin blocked less than 100% of minimum margin required. (Max leverage of 20% or 5 times).
The above essentially means that in a phased manner the broking industry will move to a structure where intraday leverages offered can’t exceed what is already offered by VAR+ELM (or 20%) for stocks and SPAN+Exposure for F&O by Sep 2021.