Have you seen this hashtag 'notradingday' was trending on Twitter on September 1, 2021. Do you wonder why it was trending? Just read this blog and you will get all the answers to these burning questions. In this blog, we have covered all the new upfront margin guidelines released by SEBI, F&O margin rules, and their effects on options traders in detail. In case you don’t know the concept of upfront margin and peak margin, don’t worry! we also have discussed peak margin and upfront margin in detail.
SEBI New Peak Margin Rules
The Securities and Exchange Board of India (SEBI) has released new mandatory guidelines for margin trading. In that guidelines, SEBI has increased the upfront margin requirement to 100% from Wednesday (1st September 2021). According to the new peak margin rule, traders will be required to give 100% of the total margin upfront for their trades. In this new norm, intraday traders will have to pay a 100% upfront margin instead of 75% upfront margins. For example, If you want to buy stocks worth ₹1 lakh of ABC company, if the value at risk margin for the stock is 16.11% then, you must have approximately about ₹16,000 (16.11% of 100000) in your account.
Let's discuss what is peak margin and upfront margin?
Prices of shares keep on moving every day. Margin is a kind of safety deposit to ensure that buyers bring money and sellers bring shares to complete their obligations even though the prices have moved down or up. One margin at the time of placing the order (upfront margin) and another to cover the notional loss (Peak margin). Margin payments ensure that each investor is serious about buying or selling shares.
The minimum margin that an investor should maintain in his/her account either in the form of funds or securities based on all open positions at any given time is called the Peak Margin. The range of peak margin is a minimum of 20% for stocks and a minimum of the sum of SPAN and exposure margins for F&O.
The margin which traders require to pay in advance (upfront) for buying or selling the trades is called the Upfront Margin. The logic behind the upfront margin for selling shares is that the regulator wants the seller to keep the commitment that he or she will deliver the shares within the settlement cycle. Similarly for buying, one has to pay upfront margins plus broking and other transaction charges to the brokerage.
Upfront margin guidelines released by SEBI until now:
Margin is a specific amount one needs to have for hedging stocks. The peak margin concept has come into effect from December 2020 which was introduced by SEBI.
Let’s decode new upfront margin rules by SEBI and their effect on traders:
SEBI Peak Margin Requirement
The circular of SEBI (Securities and Exchange Board of India ) states that the peak margin required will be 100% from September 1, 2021. Now you must have got a question that if I want to buy shares of Rs. 1 lakh then do I need to maintain Rs.1 lakh in my account? the answer is No. The meaning of 100% margin is different here. In the share market, every share has its peak margin decided depending on its volatility, liquidity, and other parameters in the market. For example, the value of a share is Rs. 100 and its peak margin is decided to be 20% then according to the new rules of SEBI you have to maintain a minimum of 20 Rs (100% of 20) in your account to buy that share. Earlier this requirement was 75% (75% of 20= 15 Rs).
F&O Margin Rule
Suppose you require a maximum 1.5 lakh margin to buy a lot of futures. Before these new regulations you just have to pay a minimum of 25% (i.e.in this case 25% of 1.5lakh) but SEBI has increased this margin requirement to 50% then 75% and now 100% respectively. This means traders are now required to arrange more money for trading.
If you want to buy options then these rules won't impact you much because here you may require less capital if you buy a share for the long term such as for 1 month, 2 months, or a year. Trading in options will continue in the same manner as it was in delivery trading before.
New Rule for BTST (Buy Today Sell Tomorrow)
From now on traders can not utilize their 100% profit to trade the same day in BTST trading. A trader can utilize only 80% of his profit for another trade. This is because according to new norms the remaining 20% profit will be transfer to the trader's account on T+2 days. This will reduce the trading volume.
Upfront Margin Rule
Another new change SEBI brought is that the Clients selling their shares in the cash market need to pay an upfront margin too. For buying, traders need to pay upfront margins plus broking and other transaction charges to the brokerage. Exchanges will send system-generated details of the margins required for sell positions taken by their clients (SPAN + Exposure) to all brokerages on daily basis.
The Rule for Leverage
An intraday trader can now get only a maximum of up to 5 times leverage. Because of this trading volume for intraday traders will decrease and so as their profit or loss.
The Rule for Pledging
SEBI has now disallowed brokerage firms from pledging client securities to any third party by invoking such PoAs. Therefore, pledging has to be done only by the client directly, wherein funds from the pledge get credited directly to the client’s bank account. The idea is to ensure that client securities are not misused by the brokerages to do transactions for themselves or some other close clients.
Suppose you require 1.50 lakh to trade in NIFTY. After buying these NIFTY futures you have also bought PUT for hedging. Now in this case, if you want to sell your position then you must sell your NIFTY futures first and then sell your PUT. If you sell PUT first and then NIFTY, then there is a chance that your margin may fall below the minimum margin requirement and you can be charged with a penalty.
How brokers have found the way through this?
Many brokers have introduced Early pay-in as SEBI has decided T+2 for clearance of intraday traders. If you don’t want to pay an upfront margin, then you can sell the whole shares, marking it as an early pay-in. In Early Pay In, instead of T+2 settlement, the stocks would be debited in your account immediately and will be sent for delivery to depositories and custodians. The sale proceeds will come back to the client on a T+2 basis only.
All your confusion related to the new SEBI peak margin rules must have gone until now. Many traders and brokers are not happy with these margin rules by sebi but SEBI intends to save gullible investors from unscrupulous brokerages. The fine-tuning of the new rules will benefit all stakeholders. SEBI (Securities and Exchange Board of India) is to establish a risk-free financial environment for both stock market brokers as well as for investors.