Peak Margin Rules: Margin requirement reaches a new peak!

A few days before, NSE technical glitch would have made you sad as you lost the opportunity to earn profits without any fault of your own. But you will be sadder after knowing that the new peak margin norms came into effect from March 1, wherein SEBI is planning to double the peak margin. It looks like SEBI is planning to convert us from traders to investors. Trading may get you more profits, but what is the point of becoming a millionaire if you don't even have time to enjoy your life.

Coming back, let's take a look at the concept of peak margin first before knowing the norms. 

What is Peak Margin?

You may know that margin is the amount collected by brokers from their clients while placing different kinds of orders like Delivery or Intraday orders. For example, if the margin is 20% in intraday trading, we can buy Rs. 5000 worth of stocks with just Rs. 1000!

Wef December 2020, the peak margin was applicable. In this, the clearing corporation of the stock exchange sends four snapshots of trading positions at random times. Lets' understand it with an example:

Assume you short 200 shares of Dabur at Rs. 500 at 10 AM with the expectation that it will fall. It falls, and you cover your short position at 3 PM. The net obligation is zero since you squared off your position. But the clearing corporation will take four snapshots from 9 AM to 4 PM. The margin will be based on the highest snapshot.

*Applicable wef March 1 2021

The Scenario Before

Before December 2020, traders preferred intraday trades as margin requirements were considered on the end-of-day positions. That is why they didn't have to worry about margin if they squared off their trades before the closing of the trading session. But now, the snapshots taken at random times may lead to a shortfall if sufficient balance is not maintained.

Also, the margin was 20% till November 2020, which was increased to 25% in December 2020. But the new norms will affect the intraday trades dynamically, which constitutes around 70% of total trades in the stock market!

New Peak Margin Norms: Correcting the Stock Market

Currently, the stock market has been on a bull run due to high Foreign Portfolio Investment and the increased retail trading due to the pandemic and surprisingly, after the gigantic success of the web series Scam 1992. You would be surprised to know that 17 Lakhs Demat Accounts have opened in just a month of January 2021!! Fearing excess liquidity, SEBI was forced to initiate new peak margin norms to avoid such a situation. 

Previously, the peak margin was four times for derivative orders wef December 2020. But this limit is being further reduced to two times from March 2021. It means that you have to pay Rs 1000 to buy Rs 2000 worth of stocks. Also, there is a penalty of 0.5-5% if the client defaults on margins. 

This will adversely impact the liquidity in the stock market. Besides affecting liquidity, it will also reduce the revenue of the brokers. That is the reason why the India BSE Brokers Forum and Association of National Exchange Members of India (ANMI) have written to SEBI not to increase the current margins and maintain the status quo.   

SEBI has directed to increase the peak margin to 75% from June 2021 and 100% from September 2021. It will immensely affect the trade volumes in the share market. With reduced trading, the share prices will fall, leading to the long-awaited correction, as desired by bears.

Calculating the Required Margin

You have seen that the margin has doubled to 50%. You might be thinking about the base price of margin. Don't worry, we have got you covered. 

In intraday trades in equity, Base amount = Value at Risk + Extreme Loss Margin (% of maximum circuit possible). E.g., if you bought shares worth Rs 1 Lakhs and the circuit is 20%, the base amount is 1.2 Lakhs. Considering the margin to be 50%, you would be required to keep a margin of Rs. 60000.

In the Derivative segment, the base is the sum of SPAN and Exposure Margin. It is calculated based on risk and volatility. E.g., The Exposure margin for index futures contracts is 3%. If the value of a NIFTY futures contract is Rs. 5 Lakhs, then the Exposure margin applicable thereon will be Rs. 15000.

The leverage in commodity or currency derivatives and bracket orders is twice the leverage of intraday trades.

Impact on Retail Traders

• As mentioned earlier, the new trade norms will reduce liquidity in the stock market. The retail derivative volumes are expected to decline by 20-30% after March 1.
• The penalty of up to 5% will demotivate the traders to trade with margins. Furthermore, the government has levied 18% GST, making the effective maximum penalty to be 5.9% of the shortfall.
• The peak margin norms will remain as fear in investors' minds and compel them to square off their positions as soon as possible to avoid non-compliance.
• The norms implemented wef December 2020 also involved reducing the credit available for taking other positions after selling delivery trades to 80%. The remaining 20% will be available on the next trading day (T+1). It further declined retail trading.

Conclusion

The increased peak margin requirements do not imply that we cannot trade with leverage. 

So what will be the point of intraday orders if the premium becomes 100%? The penalty imposed on traders will be like oil in the fire, which will make traders fearful of squaring off their positions, besides reducing the volumes in the cash and derivative segment drastically. The reduction in credit available adds to the problem, making the entire trading process more complicated to understand.

All in all, SEBI has been introducing these new norms for the greater benefit of the retail investors and to create a disciplined and standardized trading environment. But, it all comes down to how these norms are implemented.

As an investor, you must remember that your goal should be to go ahead, not fast. So invest and make money while you relax.