Sebi's peak margin, intraday leverage rules explained by Zerodha's Nithin Kamath

Peak margin reporting has been brought about to restrict brokers from providing additional leverage over and above what VAR+ELM (with minimum 20% for stocks) and SPAN + Exposure (F&O – Equity, Commodity, Currency) already offer.

(Note: VaR stands for Value at Risk and ELM stands for Extreme Loss Margin)

Starting December 1, 2020, the maximum intraday leverage that can be offered by a broker will be restricted and this maximum leverage will keep reducing until September 1, 2021 post which a broker can give maximum leverage = VAR+ELM (min 20%) or SPAN + Exposure.

The minimum margin as I said earlier is VAR+ELM (with a minimum 20%) for stocks and SPAN +Exposure for F&O. This minimum margin inherently has leverage, but there can’t be any additional leverage over and above this.

2nd order effects

To implement this intraday restriction, Clearing corporations (CC) will now take 4 snapshots of client positions at random times during the day and see if there was sufficient margin available with the broker at that time.

Today brokers only report margins at the end of the day and not intraday, hence, were able to give that additional leverage even if the client didn’t have minimum margins on the condition that the position will be squared off before the end of the day (using product types like MIS, BO, CO, etc).

But, going forward, if there isn’t the minimum margin for intraday positions, there will be a short margin penalty, similar to a short margin penalty today for a shortfall in the margin for the end of day positions.

This is a completely new process for the industry and after much deliberation between the Exchanges, Regulators, and Brokers, the Exchanges released an FAQ on November 27 giving clarifications on peak margin collection and reporting.

This FAQ now means that there will be a few 2nd order effects of the new peak margin reporting regime, over and above the restriction on intraday leverages.

80% credit from selling holdings can be used on the same day

If you sell stocks from your Demat or T1 (BTST), going forward, only 80% credit against the sale value will be available for subsequent trades in the same/other segments on the selling day. Currently, you get 100% credit.

The reason for this is because we are now required to block 20% of selling credit as margin until we can debit the shares from your Demat and make it available to the CC (Early payin or EPI), which typically will happen only after the market closes on a trading day.

So what this also means is that say if you’ve sold 1,000 shares of RIL that you hold in your Demat account, you will only be able to buy back 800 shares of RIL during the day if you don’t have any other funds/margin in your account.

The reason being, on selling 1,000 shares, you will now get 80% credit, so you will have enough funds to only buy back 80% of shares. Of course, you can buy back the entire 100% if you have additional funds/margin in your account.

In the below two cases, we will warn you on the order form that there potentially can be a peak margin penalty, so you can be alert and avoid placing them. These are tricky topics, hence explaining with an example.

Always first exit the high risk (margin) leg of a portfolio of F&O positions:

Assume you have bought 1 lot of Nifty futures and bought 1 lot of Nifty puts. The margin required for naked Nifty futures is Rs 1.5 lakhs, but since you also have bought the puts which cover the risk completely, the margin required drops to Rs 30,000.

Assume you have Rs 1.5lks in your account and that you bought some stocks with the remaining Rs 1.2lks in your account and the only margin remaining is Rs 30,000 against which you hold 1 Nifty long future and 1 Nifty long put.

If you now exit the Nifty long put position first, the margin requirement for 1 lot Nifty future will go back up to Rs 1.5lks as the position isn’t hedged anymore.

While you might exit the Long Nifty future immediately, but the margin in your account until you exit is only Rs 30,000 against which you hold 1 Nifty future, which means that there potentially can be a peak margin penalty on the Rs 1.2lks that you will be short at this time if the CC took a snapshot of your total position + margin available.

So going forward, if you don’t have any additional margin, it is always best to exit the higher risk/margin position first before exiting the lower risk positions.

So, in the above example, exit the long Nifty future first and then the long puts to avoid any potential peak margin penalty.

Don’t use holding sell credit for intraday trades if you plan to buyback the holdings

Assume you have 100 shares of RIL in your Demat and no other margin. Today, you can sell the 100 shares at say Rs 2000 and use the entire credit of Rs 2lks to take intraday trades in stocks or F&O.

Firstly, as I explained earlier, you will now be able to use only Rs 1.6lks and not Rs 2lks. But there is another issue. Assuming you used this Rs 1.6lks to intraday trade (Buy & Sell) 1 lot of Nifty futures and also bought back Rs 1.6lks worth of Reliance shares that you had earlier sold on the same trading day.Going forward, there can potentially be a peak margin penalty for the intraday Nifty future trade, here is why.

As we have explained in this post, the reason we can allow you to use the credit from selling stocks to buy other stocks or trade F&O on the same day is that we debit the shares from your Demat and give it to the clearing corporation(CC) on the same trading day (Early payin or EPI).

These stocks transferred as EPI can be then considered as margins, both for upfront and peak margin requirements.

But in the above example, if you bought back 80% of stocks sold, there will be only 200 shares or Rs 40,000 worth of Reliance that will be transferred to the CC.

This means that when you traded Nifty futures, you were short Rs 1.2lks (Rs 1.6lks – Rs 40k) on which there can potentially be a peak margin penalty.

So, if you exit your holdings and buyback the sold holdings on the same day, and if you had used the proceeds of the holdings sold to take another intraday trade, there could be a peak margin penalty on the intraday trade if you didn’t have sufficient funds available other than the credit from selling your holdings.

We will alert you on the order form when you are buying back the stock sold on the same day, so you can make sure to add funds to avoid margin penalty if you didn’t have any other margins for the intraday trade.

Also, one of the brokerage firms as part of their policy has decided to not allow multiple intraday trades with the same margin for whatever internal technological limitations. This news has been creating chaos on social media.

So in gist, starting Dec 1st, 2020, there is going to be a restriction on maximum intraday leverages offered by brokerage firms. 80% of credit from selling holdings will be available for further trades on the same day.

Always exit the higher risk/margin position first if you hold a portfolio of F&O positions. If you sell your holdings and used the proceeds for intraday trading, avoid buying back the stock sold if you don’t have sufficient funds for the intraday trade.'

(Nithin Kamath, CEO, Zerodha)

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