The SEBI circular on upfront margins (PDF
) dated July 20, 2020 prescribed the norms for collecting upfront margins and introduced the concept of peak margins.
A peak margin was introduced to curb excessive leverage provided by some brokers, which put the entire market at risk. Previously, margins were only calculated on End of Day (EOD) positions, brokers granted clients excess leverage intraday and required them to close positions before the end of the day.
As a result of this excess leverage, SEBI required clearing corporations to take snapshots of intraday positions at least four times a day and calculate margins on these positions. According to SEBI's circular, here's an excerpt:
(i) Clearing Corporations shall send minimum 4 snapshots of client wise margin requirement to TMs/CMs for them to know the intraday margin requirement per client in each segment
. The number of times snapshots need to be sent in a day may be decided by the respective Clearing Corporation depending on market timings subject to a minimum of 4 snapshots in a day. The snapshots would be randomly taken in pre-defined time windows.
Due to this, the clearing corporation today takes 4 snapshots of positions held by its clients at random intervals. Any shortfall in margin is subject to a penalty if the broker does not report available margins against the highest margin value across the 4 files. The circular explains this in detail:
(ii) The client wise margin file
(MG-12113) provided by the CCs to TMs/CMs shall contain
the EOD margin requirements of the client as well as the peak margin requirement of the client, across each of the intra-day snapshots
(iii) The member shall have to report the margin collected from each client, as at EOD and peak margin collected during the day, in the following mariner:
a) EOD margin obligation of the client shall be compared with the respective client margin available with the TM/CM at EOD.
b) Peak margin obligation of the client, across the snapshots, shall be compared with respective client peak margin available with the TM/CM during the day.
Higher of the shortfall in collection of the margin obligations at (a) and (b) above, shall be considered for levying of penalty
as per the extant framework.
The intention of the market regulator is undeniable, but the manner in which the circular has been implemented is not without flaws. Samco does not provide any excess leverage to clients, and always stipulates the collection of upfront margins when clients are taking positions. However, there are circumstances where the margins shoot up after clients have entered into positions, resulting in a shortfall. There is no way for a broker to control/know the margins charged by the Exchange in advance. Here are examples:
Increase in margins after EOD upon expiry of weekly contracts
As you are aware, there are weekly option contracts available for various indices: BANK NIFTY, NIFTY, and FINNIFTY. There are often instances where a client may have a hedged position, holding one leg in a weekly contract and another leg in a monthly contract. On expiry day, in the event that a client does not square off the weekly contract (expiring that day), the margins shoot up after market close. Margins are lower for the hedged position until 3:30 PM, and shoot up thereafter.
This causes a great deal of inconvenience, with the exchanges often levying unnecessary penalties due to the margin shortfall in the end-of-day file. The fact that such a shortfall is likely to occur may not immediately be apparent to a client either.
Peak margins due to lag in closing both legs of hedged position
This example is in continuation of the above point. After implementation of the peak margin framework, it is possible for a penalty to be levied despite a client having closed both legs of a hedged trade. This can happen in case the peak margin snapshot is taken at a time when one leg of the trade is closed and the other is yet to be closed.
- Let’s assume that Client A wants to trade in F&O and transfers ₹1,00,000 to his/her trading account
- A takes a NIFTY long position in May contract - margin blocked is ₹60,000
- A takes a NIFTY short position in June contract - margin blocked is now ₹20,000/- (on account of the position currently being hedged; free balance in account: ₹80,000/-)
- A takes a BANKNIFTY long position in May contract - margin blocked ₹60,000/-
- In this case, A has fulfilled all margin requirements
- A now closes the first leg of the NIFTY position (long May), as a result of which the total margin required in the account goes up to ₹1,20,000/-
- The system of a trading member raises an alert and informs A of short margins
- NSE takes a snapshot of the position at this instance and captures ₹1,20,000/- as the margin required
- A, on receipt of an alert from the trading member, closes the other leg of NIFTY, as a result of which the margin required drops to ₹60,000/- (Since only the BANKNIFTY position is open)
In this example, an unnecessary penalty gets levied for being short on peak margins, despite the client having squared up the outstanding positions and complying with the margin requirements on an end-of-day basis.
All brokers are subject to audits by internal auditors, concurrent auditors, inspections by stock exchanges - both onsite and offsite, inspection by market regulator SEBI. As such, it is unlikely that a broker is making money by posting entries on the client’s ledger in the garb of “margin penalty”.