Phase 3 of SEBI's peak margin rule applicable from June 1; here's what it means to you

With a view to safeguard the interest of retail investors, market regulator SEBI in July 2020 notified the peak margin rules. The rationale behind the peak margins was to maintain some discipline in terms of trading, investment, brokers funding or taking leverage positions or intraday positions. As result, the said rule is expected to keep the markets and system strong as well as efficient.

As per SEBI’s notification, the peak margins rule was to be implemented in four stages. Between December 2020 and February 2021, traders were supposed to maintain at least 25% of the peak (maximum) margin. This margin was raised to 50% between March 2021 and May 2021 in phase two.

As a part of the phased adoption starting June 1, 2021, traders are expected to have 75% of the peak margin available with the broker i.e. intraday leverage provided for Equity Cash and F&O Intraday would be 1.33X going forward.

In the last and fourth phase by Sep 2021, clients should have 100% of the peak margin obligation available with the broker during the day.

What is peak margin?

Previously, margin reporting by brokers used to happen only at the end of the day for all the carry-forwarded trades executed by the customer on that trading day.

Because of this brokers were able to provide higher leverages in intraday (MIS), cover order (CO) and bracket order (BO).

Customers were able to trade with lower margins from the prescribed limit of VAR (Value-At-Risk) + ELM (Extreme Loss Margin) for equities and SPAN + Exposure for F&O.

Leverages lead to risk at the broker’s end as there could be cases where the customers might not be able to provide the margins at the end of the day.

What does it mean to you?

The peak margin actually enhances the risk at the individual level and at the aggregate market level. Sample this. If a trader knows that he has about 5% of the value of his trade as margin with his broker, he will probably limit his trading loss to 2-3% of the value of the trade. On the other hand, if the margin is now enhanced to, say 10%, the trader would probably be tempted to incur more losses and cut the losses to 7-8%.

Association of National Exchanges Members of India (Anmi) plea

Broking industry body Association of National Exchanges Members of India (Anmi) has urged regulatory authorities to reconsider the proposed 100% levy on day trade peak margins. In a letter to the Securities and Exchange Board of India (SEBI), Anmi said that the proposed margin is 300% of what should have been the actual levy.

“There is a great disconnect between what is being collected from clients and what needs to be collected vis-a-vis the attendant risks arising in intraday trades. Anmi, however, reiterates that they are not against a collection of intraday margins levied on clients nor the levy of full margin on the clearing member irrespective of the nature of the trade,” it said in a letter to SEBI.