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CPAI asks Sebi to continue with current 50% peak margin requirement, defers next stage

The association has raised concerns ahead of the rollout of the new 75 per cent peak margin requirement from June 1.

May 31, 2021 / 07:51 PM IST
Sebi | PC-Shutterstock

Sebi | PC-Shutterstock

Commodity Participants Association of India (CPAI) has asked markets regulator Sebi to continue with the current level of 50 per cent peak margins and defer the proposed higher limit of 75 per cent for the time being. The association has raised concerns ahead of the rollout of the new 75 per cent peak margin requirement from June 1.

In its virtual meeting with Sebi on Friday, the CPAI presented possible scenarios that may emerge during the next phase of peak margin. It said that a situation may arise whereby an intraday margin call will be resolved by liquidating the position still a client could be penalised.

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"…penalizing the client in such a scenario would be unfair. There is no way for the member or the client to predict market movement and keep margin in advance," it said. In the subsequent two phases of peak margin, such situations will be difficult to handle.

"We therefore urge upon Sebi that current level of peak margins (50 per cent) margins should stay for times to come or defer the next stage of peak for time being," the CPAI said. The CPAI is an association of participants in commodity exchanges and commodity derivative segments.

Explaining the situation with an example, the CPAI said that suppose a client has deposited an upfront margin of say Rs 1 lakh at the start of the day. The client builds a position of shorting a call option and as a result his margin is Rs 95,000. Snapshot 1 taken around 10.15 am for peak intraday margin shows margin of Rs 98,000 and the client is compliant. After that, due to adverse movement the margin requirement increases to Rs 125,000.

Snapshot 2 taken at 11.45 am for peak intraday margin shows margin is Rs 125,000 so client has a shortfall of Rs 25,000; accordingly broker issues a margin call. Snapshot 3 at 1.15 pm for peak intraday margin is Rs 138,000 so client continues to be in margin call and broker is waiting for the collaterals to be topped up.

Now, assume client is unable to top up the collateral in response to margin call and asks the broker to liquidate the position. Snapshot 4 taken at 3.15 pm for peak intraday margin show reportable margin as nil and the account as compliant.

To calculate the peak margin position intraday, clearing corporations randomly select 4 times in the day to take snapshots of all margins and the highest margin of the four snapshots taken becomes peak margin. Under the present practice, the CPAI said that client is compliant at market opening and initiation of the trade. During the day peak margin can go up to 2 lakh .The breach of margin intraday which is rectified intraday does not result in penalty for the client.

In the new scenario, the association said that the peak margin reportable by member will be Rs 138,000 which will result in a shortfall of Rs 38,000 even though the intraday margin call was resolved liquidating the position. While immediate corrective action has been taken by the client in the above example it is still leading to a penalty for the client, it added.

The Sebi's peak margin regulation is being implemented in the phased manner. In the first phase, traders were supposed to maintain at least 25 per cent of the peak margin between December 2020 and February 2021. This margin was raised to 50 per cent between March and May in the second phase and is proposed to be raised to 75 per cent between June and August in the third phase and finally to 100 per cent from September 1 onwards.

Earlier this month, stock brokers' association Anmi had written to the Sebi as well as the finance ministry regarding the proposal to have 100 per cent peak margin for intra-day trades.

first published: May 31, 2021 07:51 pm