What is peak margining system and what impact will it have on traders?

peak What is peak margining system and what impact will it have on traders?

With the new Peak Margining System for collection of upfront margins kicking in from the 01st of December, it is essential for all of us to understand it with greater clarity. The whole idea of the peak margining system is to reduce the extent of leverage available to traders; especially the intraday traders so that rampant speculation and undue risk can be avoided.

What exactly is Peak Margining all about?

You would have noticed that you would not be able to place any order if you do not have cash balance in your ledger or pledged securities in your demat account. The money or pledged securities thus required to place an order is called the Margin. This margin requirement is different for different securities and segments. Click Here to know our margin requirement. We as a broker, at the end of each day will be reporting each and every transaction of our clients along with the margin that we collect towards the trade to the exchanges and clearing corporation. This is called Margin reporting. If there is any shortfall in collecting the required margins, the exchanges will levy penalty on the shortfall. This was so far done only on End of Day basis. In this case, if you had bought some shares during the day and had squared off before the end of the day, you would not have any position to be reported at the end of the day and hence, there would be no margin required to be collected. This is going to change with Peak Margin Reporting.

With the Peak Margin reporting which is to be live from 1st of December, 2020, this collection is now made mandatory during the day itself. This implies that the brokers will now be required to collect peak margins from the clients even on intraday trades and not just on an end-of-day or EOD carry forward trades. This will be monitored by the exchanges and clearing corporation by taking random snapshots of collected margins across brokers and penalizing any broker that does not follow the peak margin collection norms strictly. Here is how it is expected to be monitored. The respective exchange / clearing corporations will send four random snapshots of broker-wise and client-wise trading positions based on which the highest margin will be calculated. The problem is that even when clients square up 100% of their positions intraday, they are still subject to peak margins.

As this is being introduced for the first time, it is going to be implemented in stages. Currently the minimum margin to be collected is 20% of traded value for Equity Cash trades  and 20% of (SPAN + Exposure Margin) for Derivatives trades. The various stages in which the peak margin collection is going to be implemented is given below

StagesPeak Margin Requirement
Dec 2020 – Feb 202125% of the minimum 20% which is 5% of trade value for stocks or 25% of (SPAN+Exposure) for Derivatives
Mar 2021 – May 202150% of the minimum 20% which is 10% of trade value for stocks or 50% of (SPAN+Exposure) for Derivatives
June 2021 – Aug 202175% of the minimum 20% which is 15% of trade value for stocks or 75% of (SPAN+Exposure) for Derivatives
From September – 2021100% of the minimum 20% which is 20% of trade value for stocks or 100% of (SPAN+Exposure) for Derivatives

The biggest benefit of Peak margin

It will give a level play to all brokers. Until now, there are differences in leverage that each broker offers. One may allow clients to buy stocks worth 1 lakh for Intraday with just Rupees 1000 as margin, while the other may require Rupees 5000 to buy the same stock worth 1 lakh Intraday. The minimum margin requirement thus differs according to each broker’s risk management policy. This will no more be the case. Every broker will now have equal and fair opportunity. Remember, high leverage is a high risk game and SEBI has rightly come in to plug this. It may be painful at the time of surgery, but when it heals over the time, it will be much appreciated.

The other trigger that appears to have worked in favour of this shift to peak margins was the Karvy& BMA scams. Hence, this move of SEBI is in the best interest of clients.

Every coin has 2 sides to it. The flip side of it is this move could stifle the volumes in the cash & Derivatives segment, More so; because intraday accounts for over 85% of daily cash & Derivatives volumes on the exchange.

Changes you can expect from us

Equity Cash

For now nothing changes. As per our Margin policy we already charge 50% of (VAR+ELM+ADHOC) margins for Intra-day MIS trades. SEBI’s new rules requires us to charge minimum 5% of the value of trades. 50% of (VAR+ELM+ADDHOC) is higher than 5% of the value of trades and hence we are already complying with the peak margin requirements. So we are not required to make any changes. However we are working on a system to charge a flat intra-day margin of 15% of the value of trades to make it easy for clients to understand the MIS margins for Equity Cash trades.

Derivative Trades

Nothing changes here too for now. As per our Margin policy we already charge 50% of (SPAN+EXPOSURE) margins for Carry forward NRML/CNC trades. SEBI new rules requires us to charge minimum 25% of (SPAN+EXPOSURE) margins. Since we are already charging higher than the SEBI mandated minimum margins, effective Dec 1, 2020 we are not required to make any changes.

Cover and Bracket Order trades in ITS

Equity and Equity Derivatives CO/BO orders: We are currently charging minimum 10% flat margins for Equity and Equity Derivatives trades using product CO/BO. Again here SEBI new rule for intra-day trades requires minimum 5% margin for equity trades and 25% of (SPAN+EXPOSURE) for derivative trades. . Since we are already charging higher than the SEBI mandated minimum margins, effective Dec 1, 2020 we are not required to make any changes.

Commodity Derivatives CO/BO orders:  Let’s consider the case of 2 most widely traded Commodities – Gold and Silver. The exchange SPAN+ELM margins for Gold is 9.25% (as on 27th November 2020) and minimum margin to be collected at 25% (SPAN+ELM) = 2.32%. We were offering CO/BO margins at 1.8%. To adhere to exchange margin rules we now increase our CO/BO margins to minimum 2.4% or in other words you would get leverage in GOLD from Dec 1, 2020 of approx. 41X

The exchange SPAN+ELM margins for Silver is 14.83% (as on 27th November 2020)and minimum margin to be collected at 25% (SPAN+ELM) = 3.70%. We were offering CO/BO margins at 3.0%. To adhere to exchange margin rules we now increase our CO/BO margins to minimum 3.80% or in other words you would get leverage in SILVER from Dec 1, 2020 of approx. 26X

To view Cover / Bracket order margins details for Equity click here

To view Cover / Bracket order margins details for Commodity click here

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