Understanding the Recent Changes in the Margin Policy

The new margin policy is a very evolutionary change that would make trading processes efficient. It was introduced on July 1st, 2020 and is effective since September 1, 2020.

Margin and Pledging

Margin is a concept where investors don’t need to fill in the entire value but only need to give some amount upfront to avail an investment position. Pledging is having some amount or shares or portfolio mortgaged for availing any kind of margin or long investment positions.

The new norms are set to make the procedure for E Margin and Pledging efficient and simple. The major changes that were noticed are listed below :

PSR CHANGED – PSR means Price scan range. It indicates the deviation in market volatility and calculates margin requirements in any given market. In the new policy the PSR range has been upgraded to 6 sigma from 3.5 sigma. Hence the amount of risk that could be taken has enhanced.

Upfront margin (20%) would be compulsorily required in the cash segment. Previously also brokers kept upfront margin but it was blocked by them as per client profile. Now onwards it is mandatory for every client to keep upfront margin before performing any transactions.

Upfront margin is the calculation of VAR + ELM. VAR stands for value at risk. It is a parameter indicating the highest possible risk (loss) at any given point of time. ELM means extreme loss margin which is a measure of losses that could occur outside the range of VAR. If Upfront margin is not paid then penalty would be levied on the client.

As per SEBI the Upfront (peak) margin requirements from December 1st, 2020 till August 2021 are as follows :

EQUITY

Up to FEB 2021 – margin capped at 20 x (maximum limit)
March – May 2021 – margin capped at 10 x
June – Aug 2021 – margin capped at 7 x
From Sept 2021 onwards – margin capped at 5 x (maximum limit)

EQUITY F&O, CURRENCY AND COMMODITY

Up to FEB 2021- 25% (4 x) of SPAN + exposure margins
March – May 2021 – 50% (2 x) of SPAN + exposure margins
June – Aug 2021 – 75% (1.33 x) of SPAN + exposure margins
From Sept 2021 onwards – FULL SPAN + exposure margins

Note : SPAN means Standardized portfolio analysis of risk the margin for it is derived from an algorithm that has been designed keeping in mind the highest possible risk on global portfolios on any given single day for a trader’s account. Hence whether it is Delivery or F&O markets, SEBI is trying to cut down the margin requirements to avail more cash flow in the market in a phased and calculated manner to avoid major losses.

If the margin required exceeds the margin provided then penalty would be levied on the client. Hence they should credit their account with the required amount to avoid the penalty for exceeding margin limits (even in cash segments).

i.e. If you take up a stock position of 100 Rs for a 20 Rs. in your account (with 5x margin capacity of broker) you will be given the position but when the position overlaps your margin value you will be charged for the same. So if you take a position of 100 Rs. and due to market fluctuations your portfolio at some point shows loss of Rs.10 that means your risk increases to 110 Rs. Though at the time of square off you end up in profit but that over utilization of margin you will be charged a penalty.

Now onwards Intraday profit margins cannot be used to obtain fresh buying positions. The trader has to wait for the settlement to be done and then only he can use the profits for fresh buying. Newly bought shares can be pledged only after T+2 days by the investors. All the transactions that are done for day trading above a certain amount need to be cleared through depositories (NSDL and CDSL). OTP system has been created for obtaining permission to settle the positions.

POA (power of attorney) cannot be used for transfer of shares. It could be used for Pledging of shares on behalf of clients and also for transfer of shares to exchanges against the sale of the same. Margin pledge would be necessary for all the investors to get margin from the broker so that in case of extreme loss the broker could use that pledge and settle the loss to minimum (when amount cannot be paid by investors for the loss). Also investors need to avail the margin level before the transaction is done which wasn’t the case before.

The new norms are a debatable topic since they are implemented but they aim to make the entire procedure efficient and quick without any intervention or misuse of the client margins by the broker. As per the rules and map laid out by SEBI it seems that the margin requirements are to be capped subsequently in different time frames to make sure that the margin levels set are risk free at the maximum potential i.e. SEBI is trying to keep the risk in accordance with the worst possible scenario in global markets on any given day and providing margins that would be most suitable for minimal loss in that particular market volatility. Follow Investallign for more!