The market regulator Securities and Exchange Board of India’s (SEBI) “peak margin” norms came into effect from today. The new norms have mandated the collection of upfront margin from clients, which can be peak margin or end-of-the-day (EOD) margin, whichever is higher, in intraday as well as delivery.
Analysts believe that maximum number of trades undertaken in the system are largely intraday in nature and, with this regulation kicking in, there can be an impact on overall volumes traded on the exchanges both cash and derivatives segment.
Peak margin regulation will be implemented in the phased manner mentioned below:
Phase 1: 25 percent of the upfront margin to be available before the trade is being executed from December 1, 2020, to February 28, 2021.
Phase 2: 50 percent of the upfront margin to be available before the trade is being executed from March 1, 2021 to May 31, 2021.
Phase 3: 75 percent of the upfront margin to be available before the trade is being executed from June 1, 2021 to August 31, 2021.
Phase 4: 100 percent of the upfront margin to be available before the trade is being executed from September 1, 2021.
Earlier, margins were collected upfront and calculated on the basis of the end of day positions. The broker funded intraday positions of the clients as long as he brings the outstanding by the end of the day to below what they have already deposited as margin by the end of the day.
For example: If a trader has Rs 10,000 as margin with his broker, he can trade multiple times intraday and the broker funds that, as long as by the end of the day the MTM doesn't wipe out Rs 10,000 in margin.
What changes from today:
From today, the broker will move away from using the end of day position to calculate margin requirement to using the intraday peak position. The exchange will randomly select 4 times in the day to take snapshots of all margins and the highest margin of the 4 snapshots taken will become peak margin. This is applicable for both cash and F&O segments.
In September this year, SEBI had relaxed penalty provision in the upfront margin requirement on the condition that the client provides at least 20 percent of VAR + ELM. However, this was applicable in the cash delivery segment, while brokers continued to provide leverage in the intraday segment.
“As such, depending upon the extent of margin collection in intraday segment, different brokers will experience varying levels of volume impact from December 2020. Some brokers with technology prowess used to provide a higher leverage (5-10% of VAR + ELM) based on the strict stop loss mechanisms. However, the new regulation of peak margin requirement will neutralise any such technology prowess as all brokers will be required to ensure that peak margin requirements are fulfilled throughout,” ICICI Securities said in a note.
As per Zerodha website, the percentage of intraday orders on cash/derivatives on its platform is 55%/40% respectively. In value terms, the same is 70%/40% respectively. Around 99% of retail trades in F&O is intraday and more than 40% of these trades are due to excess leverage provided by the brokers.
Speaking to CNBC-TV18, Nithin Kamath, Founder & CEO of Zerodha said that the real kicker in terms of more leverage stalled will be from September 2021.
“Starting today, what is going to change is there is a cap on maximum leverage that can be offered by brokerage. So the impact as such today may not be as much, but over the next 9 months the maximum leverages that can be offered at brokerages will keep reducing and traders will get used to that by then,” said Kamath.
According to him, large brokers like Zerodha won't see an impact as it’s already holding margin. “Brokers at the tail-end would be impacted more,” he said.
“Customers getting only 80 percent credit same day on selling stock will have a deeper impact,” said Kamath.
(Edited by : Abhishek Jha)