Peak Margin

Published Oct 17, 2024

From December 1, 2020, the concept of peak margin reporting will be introduced. This will significantly impact the intraday margin/limits that customers currently enjoy, along with other changes. In this article, we will first explain what the concept of peak margin means and then examine how the Securities and Exchange Board of India’s (SEBI) new rules (introduced through a circular dated July 20, 2020) will affect stock market participants.

The concept of peak margin will apply to all segments—cash, futures and options, and commodities. However, since 90% of market trading occurs in derivatives, the impact will be most significant in this segment.

Peak margin requirement

Until now, margin requirements were reported based on end-of-day positions, which refer to the positions that a client carries forward to the next day. Based on these positions, the exchange imposes a margin requirement on the customer. Under the new peak margin reporting system, however, four snapshots of a client’s positions will be taken throughout the day. The highest of these positions will be used to calculate the client’s peak margin requirement for the day. Moving forward, both the end-of-day margin and peak margin will apply. If the peak margin requirement is higher than the end-of-day margin requirement, the former will prevail.

Brokers often promise customers high leverage, such as 50 times. This allows customers to deposit just Rs. 1 lakh and purchase securities worth Rs. 50 lakh intraday. At the end of the day, however, they square off all their positions or carry forward only limited positions, so that the Rs. 1 lakh in their account is sufficient to meet their margin requirement.

This practice is what SEBI aims to curb starting December 1. In the example above, if the customer’s peak position during the day was Rs. 50 lakh, the peak margin requirement will be calculated based on this position. Now, both the peak margin requirement (on the Rs. 50 lakh position) and the end-of-day margin requirement (on the Rs. 1 lakh) will be registered. The client must meet the margin requirement on their highest position during the day.

Latest Margins/Leverages can be checked here.

Phased adoption

To avoid a significant impact on market participants, SEBI will introduce its new rule in a phased manner. Customers will have to meet margin requirements as follows:

• December 2020 – February 2021: 25% of Peak Margin
• March 2021 – May 2021: 50% of Peak Margin
• June 2021 – August 2021: 75% of Peak Margin
• September 2021 onwards: 100% of Peak Margin

From September 1, 2021, clients will be required to fulfill 100% of the margin requirement.

For example, if a client traded on December 2 and his peak margin requirement was Rs. 1 lakh, he must maintain at least 25% of this amount, or Rs. 25,000, in his account. Between March and May, for similar trading, he must have Rs. 50,000. Between June and August, the required amount will rise to Rs. 75,000. Finally, starting September 1, the client will need to have Rs. 1 lakh in his account.

Changes at Stocko

• Leverage provided will be changed and the latest leverages can be checked here.
• Changes in Credit for selling from Holdings.

Changes in Credit for selling from Holdings

From 7th December 2020, if you sell any stocks from your holdings, you will receive 80% of the sale value as credit on the T-day, and the complete 100% credit will be provided on the T+1 day. The reason for this change is that, while margin reporting was previously done based on end-of-day positions, Peak Margins will now also be considered for margin reporting, in addition to end-of-day margins.

For example, if you sold stocks from your holdings, we previously credited the entire sale amount and performed Early Pay-in to depositories at the end of the day to avoid margin levies. This process will continue, but with the introduction of Peak Margin Reporting, we will also need to report the highest margin levied in your account during the day to the exchanges.

Let’s say you sold shares worth Rs. 1 lakh and later decided to buy them back on the same day. Ideally, there would be no end-of-day margin requirements since it’s an intraday trade. However, with the introduction of Peak Margin, 20% of the sale value will be levied as margin in your account. You can check this article for more details about upfront margins in the cash segment.

If there is insufficient cash in your account, a margin shortage will occur, and penalties may be levied. To avoid such penalties, we will credit 80% of the sale value, i.e., Rs. 80,000. The remaining 20% of the sale value (Rs. 20,000) will be blocked for Peak Margin reporting. This ensures that you can buy back Rs. 80,000 worth of shares, while Rs. 20,000 will be reserved for the Peak Margin requirement.

Selling from Holdings for intraday trading

Whenever you sell shares from your holdings and use the proceeds for intraday trading (in any segment such as Cash, F&O, or CDS), and later buy back the sold shares at the end of the day, there may be a shortfall in the Peak Margin.

For example, let’s say you have 1000 shares of ITC in your holdings and sell them at Rs. 200 per share. The total credit released for further trading will be Rs. 2,00,000. You then use this amount to trade intraday in Nifty futures, with an approximate margin requirement of Rs. 1,20,000.

At the end of the day, you decide to buy back 800 shares of ITC (i.e., 80% of the sold quantity). Now, as per the Peak Margin concept, if you don’t have any cash balance, the margin for the intraday Nifty trade may be short. To cover the margin requirements for the ITC trade, we will perform Early Pay-in of 200 shares of ITC. However, if you don’t have sufficient cash or shares in your account, the margin for the intraday Nifty trade will be short.

Hedged positions (While Exiting)

As you may be aware, the exchange has recently reduced margins significantly for hedged positions in options and futures, which can be checked here. However, it is important to exercise caution when exiting your hedge position. When closing out a hedge position, you are required to first square off the position with the higher margin and then square off the other leg. If you square off the leg that is hedging your position first, your margin utilization will increase significantly, which may lead to a peak margin shortage in your account.

Examples:

• If you have a Nifty futures buy position along with an ATM put option, you need to square off the Nifty futures position first and the put option later.
• If you have a sell position in Nifty 13000 CE and a buy position in Nifty 13100 CE, at the time of square-off, you must exit the 13000 CE sell first and the 13100 CE buy later.

Intraday profits

As you are aware, all realized intraday profits in the cash market and all realized intraday F&O profits and realized Marked-to-Market (M2M) profits in futures are settled on T+1 day. These profits should not be used for new positions on the same day, as doing so could lead to a peak margin shortage.

Example: Let’s say you have a balance of ₹1,00,000 and make an intraday profit of ₹20,000. Your total balance will now be ₹1,20,000. If you then make a Nifty trade (buy and sell) with a margin requirement of approximately ₹1,20,000, there will be a peak margin shortage of ₹20,000. This is because the actual balance available in your account is still ₹1,00,000, and the remaining ₹20,000 is yet to be received (on T+1).

Selling carry forwarded Buy Options for intraday trading

Whenever you sell a carry-forwarded option and use the proceeds for intraday trading (in any segment such as Cash, F&O, or CDS), and then buy back the sold options at the end of the day, there may be a peak margin shortage if you don’t have sufficient margin in your account.

Example: Let’s say you carry forward one lot of Nifty options and sell it at ₹100, so the total credit received will be ₹7,500 (100 × 75). Now, if you use this amount to make some intraday trades that require a margin of ₹7,500 and then decide to buy back the sold option at the end of the day, there will be a peak margin shortage for the intraday trade. This is because the available balance is now used up for buying back the sold option, leaving no free margin for the intraday position.

Penalty in case of margin shortfall

The penalty structure has two slabs:

Moreover, if there is a shortfall in margin requirements for three consecutive days, a penalty of 5 percent of the shortfall amount will be levied. If the shortfall persists for more than five days in a month, a penalty of 5 percent will be charged for each additional day beyond the 5th day. Therefore, the minimum penalty is 0.5 percent, but it can go as high as 5 percent depending on the duration of the shortfall.

What should clients do?

Once the circular is implemented on December 1, all brokerage houses will be required to offer the same level of leverage. Therefore, new customers should no longer choose a broker based on the level of leverage offered (as this was never an advisable practice), since all brokers will be operating under the same standards.

If, after December 1, a client wishes to take larger positions with a smaller capital outlay, they should consider taking hedged positions in derivatives. This is because Indian exchanges have drastically reduced margin requirements for hedged positions starting June 1, 2020. For further details, you can refer to the following link

Impact on brokers 

More than 90% of the trading in the markets is intraday, and a significant portion of brokers’ revenue is generated from such trades. Higher turnover results in higher brokerage fees, which is a key source of income for brokers. However, with the introduction of margin requirements from December 1, the level of leverage in the market will decrease. As a result, the overall turnover is likely to reduce, which will, in turn, affect brokers’ revenue.

Additionally, any leverage provided by brokers will have to be backed by their own funds rather than utilizing clients’ funds. This change will not only lower brokers’ revenue but also increase the cost of doing business for them.

Points to Remember

*80% Credit will be provided against Delivery sold in CNC Product, Can use this 80% for fresh delivery shares buy only.

*Kindly square off position with higher margin when exiting a hedge position or peak margin may be short

Related Articles

• Upfront Margin In Cash Segment