Peak Margin of 100% is applicable now!

Here are some of the implications of the peak margining system for the traders in the market.

Sep 02, 2021 11:09 IST India Infoline News Service Sandeep Bhardwaj |

On September 01, 2021, Indian equity and F&O markets have moved towards 100% peak margining. This is the fourth and final phase of the peak margining system. The peak margining system, which was proposed in the middle of 2020, was implemented in 4 phases as under.
Phases Effective from % of Peak Margins
Phase 1 December 2020 25% of Peak Margins
Phase 2 March 2021 50% of Peak Margins
Phase 3 June 2021 75% of Peak Margins
Phase 4 September 2021 100% of Peak Margins
 
What is 100% peak margins all about?

Prior to the phased peak margin announcement, brokers had to ensure collection of requisite margins only at the end of the trading day. That means, brokers could accommodate traders in cash and F&O with higher trading limits for intraday. However, the peak margin system pre-supposes 3 important changes that are of relevance to traders.
  • 100% margins means that the entire applicable margins have to be collected upfront before the trade is executed. For example, if the SEBI defined margin for buying 1 lot of Reliance Futures is Rs.181,000, then that amount has to be deposited upfront before taking the position. Otherwise, it will entail penalty on the broker and the client.
  • There is an important change that is applicable in the new system. Currently, most traders are familiar with payment of margins for long futures, short futures and short options. Buying in cash also entails margins. However, selling in cash does not. Going ahead, even selling from demat account will entail margins.
  • A very important shift is in the way the peak margins will be calculated. The exchange will take 4 snapshots of trade in a day and consider the maximum margin out of the four as peak margins. This is the margin that the client will have to maintain with the broker at all times. Penalties are quite steep for non-adherence.
In Dec-20, exchange started insisting on 25% of peak margins. That has been progressively scaled up to 100% effective from Sep-21.

What are the challenges in peak margins and how to overcome?

Here are some of the implications of the peak margining system for the traders in the market.
  1. For traders who have been paying upfront margins in cash and F&O, there is not going to be much of a difference under the new system. Since the full margins were anyways being paid, the peak margin system will not make a big difference.
  2. One thing that will impact all traders and investors is that under the new system, if you sell shares from your demat account, then your trading account must be funded to the extent of the margins required for such a position. That is likely to put an additional cash flow burden, but that is just for a day. One way out is to do an advance pay-in of securities, in which case the margins on sale of stocks can be avoided.
  3. Under the new system, traders who are not doing intraday trades, can only sell shares that are in the demat account. Technically, this will make BTST tough to execute since the shares are sold on the next day but the delivery comes only on T+2 day. This could have a temporary impact on cash market trading volumes.
  4. Currently, when shares are sold, the notional value of sale is available for fresh purchases immediately. However, under the new margining system, the traders will only be able to use the notional proceeds of the sale on the next day. This could again restrict the volumes on intraday trading.
Will this move impact volumes

Broker bodies like the ANMI have objected to the 100% peak margins on the assumption that such a move could dry up volumes in the market. We have to really wait to see evidence of that. However, there is one thing we have noticed in the markets in the last 20 years since futures and options were first introduced. With every technological improvement, process improvement and safety measure introduced in the market, the market volumes have eventually picked up to a much higher level.

Peak margins are a means of making the markets safer and less speculative in order to protect the interests of the large mass of retail investors. That is the positive side of the new system.

The author of this article is Mr. Sandeep Bhardwaj, CEO, IIFL Securities

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