“Starting today, intraday leverage will be reduced under the new regulation on peak margins. The maximum leverage for equity will be 5X (20% of commercial value) and 1X (100% of NRML margin) for M&O for MIS and CO product types,” Nulldha tweeted. Since intraday traders generate the maximum volumes and revenue, this should also have a significant impact on the brokerage industry. Stock market operations are expected to undergo a radical change from Wednesday, as the new margin rules of the Securities Council of India (Sebi) will come into force. The new margin rules were gradually brought forward by Sebi. The final phase of the peak margin standards will be implemented from 1 September. According to the maximum margin rule, which has been criticized by many market participants, traders are required to give 100% margin in advance to their trades. Experts say this will have an impact on intraday trading. It should be noted that Sebi introduced new margin rules for day traders a year ago. “By the way, for F&O, intraday margins could end up accounting for 105% of span+ exposure to cover intraday margin increases due to volatility or fictitious losses on short option positions,” Kamath explained while retweeting a post from Zerodha`s official Twitter account. Suppose you buy a stock worth 1 lakh that requires 20% as the minimum margin, the initial funds you need to maintain are ₹20,000. However, the minimum margin may increase depending on the stock.
More volatile stocks may require higher margins. For example, the applicable margin rate for Indiabulls Real Estate shares on the NSE on Monday was 100% – to buy shares worth 1 lakh, 1 lakh funds must be maintained throughout the trading day. On September 1, 2021, the final phase of SEBI`s upper margin rules on the Indian stock market came into effect. These regulations were introduced to curb excessive intraday speculation, which carries high risks, especially in the futures and options (F&O) segment. Margin refers to the amount of money a trader must have in their account before executing a trade. Previously, traders and clients could also make leveraged trades, as brokerage firms provided some of the required margin at a certain interest rate. This was a win-win situation for both, as brokerage firms generated interest income while traders were able to make higher trading volumes with less of their own money. The previous mechanism included the calculation of the margin requirement at the end of the trading session and volatility or fluctuations in the share price between the two were not taken into account. The final phase of the implementation of the peak margin rules comes into force today.
This means that market participants must pay an initial margin of 100% when launching a trade. If you are a trader and you are used to taking positions with intraday leverage that goes beyond what is defined by the stock market, this is no longer possible from now on. Since brokers are penalized when the margin collected is less than their clients` maximum margin commitment, they are expected not to offer such an opportunity, even if you can have a good relationship with them. It should be noted that, under the new standards, clearing companies will aim for a minimum margin throughout the session and will require brokers to collect additional margins from clients if they fall below. Investment dealers who do not should expect a penalty. The most significant change is that participants should now meet both the peak margin and end-of-day margin (EOD) commitment, whereas the previous EOD margin requirement was the only cause for concern. Thus, brokers had this leeway to give additional leverage for intraday positions. In other words, the margin collected was well below the required margin, provided that these transactions were closed at the end of the day. With margin rules based on daily positions, traders and investors were able to increase their positions during the trading day with limited funds and reduce them at the end of the day to minimize margin requirements.
Based on empirical evidence, the answer must be no, although some market participants have vehemently said that the new mechanism would affect traders. As explained earlier, the peak margin system has been implemented in stages, and markets have only grown and reached new record highs. So if you look at stock prices, they have mostly gained traction, even though the maximum margin system has been implemented in phases. Interestingly, concerns were always raised before the next step of the higher margin requirement came into effect. By the way, the Association of National Exchanges Members of India (ANMI), the umbrella organization of brokerage firms, recently wrote to the capital markets regulator, highlighting some of the compliance issues that brokerage firms face under the peak margin system. Under the new maximum margin standards, investment dealers are required to collect minimum margins for leverage-based trades in advance, compared to the previous practice of collecting them at the end of the day. On the question of whether the 100% pay-before-margin rule acts as a catalyst for illegal trading (dabba trading), as some jobbers can trade on brokers` account with stop loss the amount of money they had paid to their broker; Avinash Gorakshkar of Profitmart Securities said: “It is very difficult to confirm this as regulation has become stricter. It is therefore unlikely that the trade in dabba will increase. Of course! This will make intraday trading more difficult for future traders. He said that the increase in impact costs and the decrease in liquidity cannot be denied, but that traders and employees must adapt to the new norm as the maximum margin rule aims to reduce their risk of default. In F&O, say, a trader buys a lot of Nifty futures. The margin requirement for Nifty futures can be around 1.2 lakh (may vary from broker to broker). From September 1, 2021, the trader must maintain this margin.
Otherwise, the order will not pass, that is, it will not be able to initiate trading. Earlier said, in January, it was only 25% of 1.2 lakhs, or ₹30,000. Why this sudden switch to the new margin system? These margin requirements were gradually implemented from 1 December 2020. According to experts, the new peak margin rules will be a blow to intraday trading, as margins are now increased in advance, unlike the previous practice of collecting at the end of the day. Anmi had also found that the 100% levy on intraday transactions was 3.33% higher than the actual maximum margin. More recently, the StockBrokers Association wrote to Sebi to tell him that it was impossible to comply with its upper margin provisions. Many brokers even believe that the maximum margin standards introduced by the market regulator are draconian. Suppose you buy a share worth 1 lakh, the margin requirement in advance is ₹20,000. It should be noted that 20% is a minimum margin and can increase depending on the stock.
That said, more volatile stocks may require higher margins. The change in the margin system did not happen overnight. Capital market supervision introduced the new framework in stages. In the first phase, between December 2020 and February 2021, it was required that clients have at least 25% of the maximum margin with a broker. In the second phase, which begins on March 1, the minimum requirement has been increased to 50%. In the third phase (June to August) and in the fourth phase (from September), the margin requirement would be increased to 75% and 100% respectively. Brokers who do not comply with the minimum maximum margin requirement would be fined. In addition, the new mechanism has limited the maximum leverage a broker can offer its clients to around 20%.
It is important to note that participants also have to deal with the limited ease of use of the proceeds from the sale of the shares they owned. This means that only 80% of the value of sales can be used as margin for new transactions. However, under the “maximum margin” mechanism, the amount of funds available to purchase shares on the same day after a sale transaction would be reduced. This is because the margin requirement is calculated during the session and any price fluctuation would affect the quantum of margin available for new transactions. .