What Is Peak Margin Rules

16 April 2022

Blog post

Previously, margin requirements were reported on the basis of end-of-day positions. Based on these positions, the exchange imposed a margin on the client. As part of the “Peak Margin” framework, brokers are required to report margin details several times during the trading session. The new framework requires clearing companies to take at least four random snapshots of the total margin status during the trading session. The highest margin requirement resulting from the various snapshots would be the “peak margin” for the day. After that, the maximum margin requirement would be offset by the investor`s available margin and any shortfall would result in a penalty. As part of the final phase of the new peak margin rules, securities dealers will be subject to a penalty if the margins collected by traders in the case of spot market shares are less than 100% of the trading value and of additional scope + exposure for derivatives trading. The change in the margin system did not happen overnight. Capital market supervision introduced the new framework in stages. In the first phase, between December 2020 and February 2021, it was required that clients have at least 25% of the maximum margin with a broker. In the second phase, which begins on March 1, the minimum requirement has been increased to 50%.

In the third phase (June to August) and in the fourth phase (from September), the margin requirement would be increased to 75% and 100% respectively. Brokers who do not comply with the minimum maximum margin requirement would be fined. In addition, the new mechanism has limited the maximum leverage a broker can offer its clients to around 20%. These margin requirements were gradually implemented from 1 December 2020. Anmi had also found that the 100% levy on intraday transactions was 3.33% higher than the actual maximum margin. More recently, the StockBrokers Association wrote to Sebi to tell him that it was impossible to comply with its upper margin provisions. Many brokers even believe that the maximum margin standards introduced by the market regulator are draconian. Traders are not happy with the new peak margin standards as they now have to park more money to meet the margin requirements for trading. In fact, trading futures and options (F&O) is also becoming more expensive.

On the question of whether the 100% pay-before-margin rule acts as a catalyst for illegal trading (dabba trading), as some jobbers can trade on brokers` account with stop loss the amount of money they had paid to their broker; Avinash Gorakshkar of Profitmart Securities said: “It is very difficult to confirm this as regulation has become stricter. It is therefore unlikely that the trade in dabba will increase. Of course! This will make intraday trading more difficult for future traders. He said that the increase in impact costs and the decrease in liquidity cannot be denied, but that traders and employees must adapt to the new norm as the maximum margin rule aims to reduce their risk of default. The “peak margin” is the collective reporting of customer margin in different segments. (And these segments are EQUITY, F&O Equity, F&O Currency and F&O Commodity) by stockbrokers during the day, based on the peak theory. The clearing arms of the exchanges send four snapshots of broker- and client-focused trading positions, on the basis of which the highest pay margin must be taken into account. The clearing arms of the exchanges send four snapshots of broker- and client-focused trading positions, on the basis of which the highest pay margin must be taken into account. No. The Trading Member is not required to receive advance/peak margins in relation to positions for which Clients make an advance deposit of securities into the Trading Member`s common account on the day of execution of the Transaction.

Although there is indeed a lot of noise about the peak margin system, it is a fact that it is not new and has been gradually implemented since December of last year. The Securities and Exchange Board of India (SEBI) introduced the first phase from 1 December 2020, when the cap was set at 25%. On 1 March 2021, the threshold was raised to 50% and the third phase began on 1 June, when it was raised to 75%. The fourth and final phase came into force today (1 September), during which the margin requirement was increased to 100%. There is no clear yes or no answer to this question. As mentioned earlier, given that day trading accounts for a large part of trading volume, there could be a blow to volumes in the early days. However, the new framework would also enhance overall market security. A higher margin requirement ensures that the investor has sufficient funds to deal with a potential risk that could arise due to sudden and significant price fluctuations. “By the way, for F&O, intraday margins could end up accounting for 105% of span+ exposure to cover intraday margin increases due to volatility or fictitious losses on short option positions,” Kamath explained while retweeting a post from Zerodha`s official Twitter account.

Margins allow investors and traders in the stock market to buy shares on credit. The lower the margin requirements, the lower the equity a person must invest to complete a transaction. Peak margin rules aim to set stricter limits on the level of leverage and thus take the risk that an investor or trader can take in their intraday positions. Margins are of different types – VaR (Value at Risk), ELM (Extreme Loss Margin), SPAN (Standard Portfolio Analysis of Risk), Exposure Margin, Special Margin and Mark-to-Market Margin. Although it may seem complicated and technical, each of the margins has been structured with a defined reason. For example, VaR`s margin is calculated to cover the biggest loss a particular stock could see on 99% of trading days and is calculated based on historical data on price movements. Margins at market value take into account the daily evolution of share prices. The margin system was introduced by the market regulator for two purposes. First, investors act according to their risk appetite and, second, in the event of a sharp and huge drop in stock prices, there is a certain buffer for investors who can replenish their margins and do not see the assets auctioned due to the total absence of required margins. With margin rules based on daily positions, traders and investors were able to increase their positions during the trading day with limited funds and reduce them at the end of the day to minimize margin requirements. As part of peak margin reporting, CC sends 4 snapshots per day at a scheduled time (in a random system-driven process). Ultimately, Exchange considers the maximum margin for these 4 snapshots/margin files for each customer, which is considered a maximum margin.

Here`s an introduction to what exactly the “peak margin” system is and how it affects markets and traders. The fourth and final phase of the new peak margin rules of the market regulator SEBI comes into force from today, according to which market participants must spend more on margins according to the new standard, intraday traders must make the entire initial payment, i.e. 100% initial margin instead of 75%. The new rules require collecting minimum margins for leverage-based trades four times per session in advance, unlike previous practices of collecting them at the end of the day. This is an important update regarding the peak margin, which will be increased in all segments from 01.06.2021. The 3rd phase of the peak margin (75% of (customer peak margin engagement through snapshots) is compared to the respective customer`s peak margin available during the day with the TM/CM. But before all that, let us know, what is the peak margin? Below are the guidelines for collecting initial margins and peak margins from customers in the Cash & Derivative segments: – We (GEPL) must report the margin collected by each customer at EOD and the maximum margin accumulated throughout the day. For the purpose of collecting periodic penalty payments within the existing framework, a higher amount shall be taken into account in the recovery of margin obligations referred to in points (a) and (b). Will a maximum margin requirement of 100% affect the markets? It should be noted that under the new standards, clearing companies will aim for a minimum margin throughout the session and will require brokers to accumulate additional margins with clients if they fall below.