10 Questions you wanted to ask about the new margining system

SEBI implemented the first set of margins changes to F&O from June 2020. There is another set of margin changes that will go live from August 2020.

Aug 04, 2020 09:08 IST India Infoline News Service

Sebi
Over the last few months, SEBI has implemented some major changes to margin collections in equity and F&O markets. The idea was to make the market transparent and risk driven. It also intends to curb excess speculation as it puts all traders and investors at risk. SEBI implemented the first set of margins changes to F&O from June 2020. There is another set of margin changes that will go live from August 2020. From December 2020, SEBI will penalize brokers for short margin collection and that will be gradually scaled up to 100% by August 2021. Here are 10 questions you always wanted to ask.

Does the new framework necessitate higher margins for naked F&O positions?

The margin calculation for naked positions (positions unhedged) is still based on the upfront collection of (SPAN + Exposure) for F&O positions. While the margins are unlikely to change substantially, it will be certainly much higher than the margins collected for hedged positions. This is applicable to indices and individual stocks.

Does the new framework offer concession for hedged F&O positions?

That is the big change in the new F&O margining system effective June 2020. Since positions like calendar spreads and bull call spreads are hedged, their risk is much lower than naked positions. Under the new margin framework, the average upfront margin collection for such hedged positions will be 65-70% lower than what is being collected today.

What does F&O margining shifting from 3.5 Sigma to 6 Sigma mean?

Till May 2020, the VAR margins on F&O covered single day risk up to the range of 3.5X Standard Deviation from the mean. This normally covers 99.73% of the situations. Under the new system, VAR margins on F&O will cover single day risk up to 6X Standard Deviation from the mean or 99.99% of cases. As volatility increases, the margins on naked positions will increase substantially.

How do equity delivery positions get impacted by the new margin rules?

The new rules for collection of margins for cash market delivery positions requires that effective August 2020, margins must be collected upfront. Today, when a trader buys in the cash market, they have the leeway till 3.15 pm to decide whether they want to square off or take delivery. Effective August; that leeway will not be available any longer! Even MIS orders will require that the full stipulated margin of (SPAN + ELM) will have to be paid upfront. Brokers cannot fund margins going ahead.

What about sell position; do I need to pay margins on sell positions too?

Yes that is the big change. When you short sell the stock for intraday trading, even then, the full margin applicable (SPAN + ELM) will have to be deposited upfront. What if you are selling shares for delivery? Even in that case, the margins will have to be paid upfront to the tune of (SPAN + ELM). The only way to avoid paying the margins on selling shares is by early pre-pay in of your stocks.

If I have shares in the demat account, can I trade intraday against these holdings?

Here again, you will have to pay the applicable (SPAN + ELM) margins for the short sell trade. However, at the end of the day, you can choose to give delivery. If you do an early pre-pay in, it will be a delivery sale transaction. The other option is to enter into a pledge agreement with the broker and use the stock as margin.

How will margin trading work, do I still transfer shares to the broker’s pool account?

If you are giving stock as margin, there will be no transferring shares to the broker pool account. Instead, you have to enter into a pledge agreement with the broker and you can take margin positions against these pledged shares. The shares will continue to remain in your demat account with a pledge block. Corporate actions will continue to accrue into your demat account only.

Will this new margin system have an impact on my intraday trades?

Yes, because your leverage will be restricted. For example, if your (SPAN + ELM) margin on a stock is 20%, then you get 5X leverage. That will be uniform for all clients. Even if you place a bracket order or cover order, this leverage will not change. So this will cut down on your speculative leverage in intraday trading substantially.

Will this move impact volumes in the market negatively?

Markets have an amazing capacity to adapt. Traders had doubts about online trading, rolling settlements and STT. But after all these, volumes are substantially higher. That is the empirical data for you. We just need to wait and watch how it evolves.

Will the penalties on inadequate margins kick in from August 2020?

No. The penalties for inadequate margins will only kick in from December 2020 and that too in phases. It is only by August 2021 that you will be totally restricted from taking any additional leverage in intraday trading.

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