Why are BOD margins considered on trading platforms instead of latest SPAN margins?

Trading
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SEBI introduced peak margin penalty in 2020 to ensure no additional intraday leverage could be provided in F&O, and leverage would be capped at 5x while trading equity. This penalty was implemented in phases and fully implemented by September 2021.

The exchange would randomly capture five snapshots of a trader’s open positions throughout the trading day, and a peak margin penalty would apply if the required margin exceeded the available margin. Ensuring sufficient margin is present is straightforward for equities, where peak margin requirement is fixed at 20%, and thus margin doesn’t change during the day. However, in the case of F&O, the SPAN margin from the exchange updates five times during market hours. The margin increases or decreases based on changes in volatility during the trading day. So, if volatility increases, the margins increase every time the SPAN is updated. This, as you can imagine, would lead to a situation where any increase in SPAN during the day would result in a peak margin penalty, even when the customer had sufficient margin available while entering an F&O position.

In May 2022, SEBI fixed this issue, stating that a margin penalty would not be applicable if the broker ensured that at least the beginning of the day (BOD) margin was available when entering a position, even if SPAN increased during the day due to increased volatility. Without having to worry about margins increasing during the day and given the lower risk after all additional intraday leverages were removed, most brokers, including us, decided not to update SPAN margins during the trading day. Consequently, a customer could take trades throughout the day with the BOD margin requirement.

However, this led to another issue. While there is a peak margin penalty for allowing a customer to enter a trade with sufficient margin, there is also an end-of-the-day (EOD) margin penalty if a broker doesn’t ensure there is sufficient minimum margin at the end of the day. This meant that if SPAN increased during the day and the account did not have sufficient margin to make up the difference, there would be no peak margin penalty, but there would be an EOD penalty, even though the customer had sufficient margin while entering the position.

For example, assume you have a Nifty futures position that needs Rs 1 lakh as SPAN margin. Say the volatility picked up and by the end of the day the margin increased to Rs 1.1 lakhs and the account didn’t have the additional Rs 10k. While there would be no upfront margin penalty, there would be an EOD penalty on the Rs 10k shortfall.

To counter this, we decided to upload the last intraday SPAN file around 3 PM, ensuring that clients with positions that have increased margins can manage their positions before the market closes.

To address this issue, SEBI issued another circular in February 2023, allowing both peak and EOD penalties to be calculated using the BOD margin files, effective from May 2, 2023. So if there was sufficient margin while entering a position and margin goes up for any reason during the trading day, there won’t be any penalty on the trading day. Of course, there would be a penalty if the margin increase isn’t brought in the next trading day.

Since we will not update the SPAN on the trading platform during trading hours, a small issue would be that customers will figure out any increase in margin only after market hours. So if margins go up, a customer will have to transfer the money to ensure there is no penalty the next day. To fix this issue, we are working on launching a separate utility that can help determine the margin requirements based on the latest SPAN during trading hours.

The reason brokers don’t update the SPAN during trading hours is that just as margins can increase, they can also decrease with lower volatility. So, if the margin penalty is based on BOD margin, there would be a penalty if a customer could trade with lower margin when the SPAN is updated for a scrip where the volatility has reduced. In an ideal world, the margin penalty should be on BOD margin or the latest SPAN margin, whichever is lower. However, building and maintaining such a system for clearing corporations is quite complex; hopefully, it will be implemented in the future.

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@MohammedFaisal Thanks for the detailed explanation

@nithin Now that neither upfront margin penalty nor EOD margin penalty is applicable even if SPAN margin requirement increases during the course of the day (due to increase in volatility or due to market moving against our favor), I hope there will no longer be a need to block an additional buffer of 4-5% extra margin. This additional margin impacts profitability and reduces ROI

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We already removed the buffer and we are charging only the exchange stipulated margin in all derivatives segment from May 02.

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So does this mean the peak margin the was previously charged for such reasons would be reimbursed?

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If 30 lacs is invested/pledge margin and 10 lacs is cash… total capital is 40 lacs and I hold a position of 35 lacs in intraday then this will be applicable and penalty will be applicable?

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Thank you for th explanation. To sum it up, in short, does it benefit the trader in general or for intraday/swing trader?
Thank you

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We haven’t been charging any peak margin penalty. If a margin penalty was charged it would be if the customer didn’t bring in losses or increase in margins on the next trading day.

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Since you hold 40lks of margin, which is more than margin used, there is no penalty applicable here.

But if you hold this position overnight, 50% of 35lks is required to be brought in cash. So Rs 17.5lks has to be present in cash, since the account has only Rs 10lks, there would be an interest on Rs 7.5lks of cash. Interest would be 0.035% per day.

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It benefits the trader as we have taken away the additional margin requirements that we had in place. We were blocking additional margins to avoid the penalty due to any intraday increase in SPAN.

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This upload of last intraday span file (the 3PM update) was actually saving a lot of penalty - especially for active traders and EoD traders who like to be loaded by EoD hence utilising maximum available margin at EoD.

And if you are not updating it henceforth at 3 PM, it will invariably lead to traders having a false sense of reality at EoD (margin available - when it is not) and that would lead them to taking positions at EoD before market close which they otherwise would not have if they had known that this would result in over-utilisation of available margin - that is worsening a bad situation further. Also, this will probably lead to bigger penalties and its certainly not a small issue.

I think the 3 PM SPAN update was a boon in disguise. Even if SEBI circular here onwards considers BoD for figuring out penalties - I don’t think the rule change in itself obviates your 3 PM span update. To my view it is necessary. I am still not clear why you have to stop the 3 PM SPAN update??

Note: If the exchange is making penalty on BoD basis, additional margin blocking is not required but still a real picture of margin utilisation should be clear to client at least before EoD.

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If we update SPAN at 3 PM and assume the SPAN has gone down for any of the contracts, there will be a margin penalty (Peak or EOD penalty) for the positions created post 3 PM.
This penalty will be calculated based on the BOD span parameters which the broker has to bear on all its customers. so we have stopped uploading intraday span.

For example
Let us say for shorting Nifty 19000 CE requires 1 lakh as per bod span file. After uploading the intraday span file at 3 PM due to market movement if suppose the same strike requires 90k.
Clients whoever create a position after 3 PM will require only 90k but the exchange will consider the BOD span (1 lakh) for margin reporting and there will be a shortfall of 10k which has to be borne by the broker.

Note - Having said that we are working on launching a separate utility that can help determine the margin requirements based on the latest SPAN during trading hours itself.

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when BOD file gets updated on next day, will i get some sort of grace period on that day to square off my over leverage part of position before the penality is charged ?

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Hmmm. Understood. And it makes perfect sense from the broker point of view.

Btw, when other way round happens (margin goes up) … what will be this penalty called? and at what time will it be charged? 9 AM? Will it end up getting charged irrespective of having next day as Working Day / Non-Working Day? Need more clarity.

On a lighter note - this penalty can be called - “RoundAbout Margin Penalty” - Because this looks like another version of “Upfront Margin Penalty” in the making. That saga ended with broker refunds - https://archives.nseindia.com/content/circulars/INSP53525.pdf. This is also leading to same / similar situation where clients are allowed and then charged penalty with imperfect view of available margin on intraday basis.

Just think about it. My 2 cents - until more clarity is there its probably too early to remove “additional margin blocking”. It was earlier saving brokers and now will save clients.

Good idea but an even better solution will be to integrate this utility with order entry and allow clients to restrict themselves if based on this utility extra margin utilisation is there.

Thanks for the clarification and update though. I will modify things keeping this change in mind. Much appreciated … :slight_smile:

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Adding to this. Even for clients with existing open positions of this contract, 10K will get freed up, when this margin is utilised for other positions, peak and EOD margin penalties will apply to the broker.

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The shortfall will get captured in the first peak snapshot taken by the clearing corporation. The snapshots are random, so it can be anytime after 9.15 AM.

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does this affect Hedged position too ? like Iron Condor and Iron Fly ?

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@Nithin, let us say that I have 90 lakhs margin in pledged stocks and 40 lahks margin in pledged liquid bees. This means I can I hold up to 80 lakhs (40 lakhs pledged stocks + 40 lakhs pledge liquid bees) worth of margin requirement positions EOD without attracting any interest charges. Can I use the unutilized 50 lakhs margin available in pledged stocks (90 lakhs pledged stocks - 40 lakhs EOD positions using pledged stocks), without bringing another 50 lakhs of cash or cash equivalent, for my intra-day trades without attracting interest charges or violating the exchange norms on margin shortage? To be more explicit, can I use the unutilized 50 lakhs margin available in pledged stocks without equivalent 50 lakhs of cash available for expiry date trades of selling call or put options that get automatically closed EOD at 3.30 pm (even if not closed by me) without attracting interest charges or violating the exchange norms on margin shortage?

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Hi, if from May 2 there will be no more peak margin penalty for that trading day, then why did I get a notification yesterday May 3 and today May 4 for provisional margin shortfall? Even though at EOD I had over 30% of my capital as margin left? Will you guys charge peak margin penalty even if the balance is positive at EOD? Or is this stopped now? Please clear this doubt as I’m getting this repeatedly for the last two days
@nithin

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Yes, for intraday trading you can utilize all the available amount in the account without any interest charges. Interest charges will be applicable only if you carry forward the position without maintaining a 50:50 ratio.

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Thanks for the prompt clarification! While I rue myself for not knowing this before, I can at least now start utilizing the free margins from the coming weekly & monthly expiry days. Thanks once again.

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