Peak Margin Policy by SEBI

All you need to know about Peak margins regulations by SEBI

As per the newly issued guidelines of SEBI, all the brokers now will have to report their margins numerous times in a day which is quite different from the current method where they report margins a single time, only when they wrap up the day’s trade. Let’s have a look at what exactly are peak margin policy and what are the implications of new amendments for traders?

What are the peak margins?

In the current methodology, brokers did margin reporting at the end of the day which had the details of the day’s carry forwarded trades executed by the traders. This reporting methodology allowed brokers to provide higher leverages to traders by giving products like cover order (CO), intraday (MIS), and bracket order (OCO). Brokers up till now asked for lower margins than the prescribed limit of SPAN + Exposure for transactions of F&O and had VAR (Value-at-risk) + ELM (Extreme Loss Margin) for equity-related services. This method creates irregularity at the broker’s end for cases may resurface where the traders show an inability to compensate the margins at the end of day’s trading, which ultimately creates a shortfall. It is this shortcoming that SEBI is trying to overcome with this move where it has mandated brokers to register margins numerous times during the day’s trade. The new guideline also affirms clearing dignitaries will be responsible for the monitoring of margin activities. These guidelines will be followed by various other margin related changes that will be implemented in phases. Currently, SEBI is channelizing phase 1 of these regulations.

What changes will be brought under Phase 1?

The new SEBI guidelines clearly mention that brokers now will have to collect at least 25% of the trader’s funds as per the prescribed limit, if the broker wants to provide intraday trading services across various products.

The equity services will have 20% of the aggregate trade value or 25% on VAR + ELM, whichever comes out to be lower.

In the same way, futures and options services will have 25% on the SPAN value + exposure margin.

What changes will be introduced in the upcoming phases?

The new changes will be rolled out in 4 phases.

Phase 1 will take begin from Dec 2020 and end in Feb 2021 where the minimum margin collected by the broker will be 25% of the prescribed trade limit.

Phase 2 will occur between Mar 2021 to May 2021 where the minimum margin to be collected by the broker in entering a position will be increased to 50% of the prescribed limit.

Similarly, phase 3 and phase 4 will begin from Jun 2021 to Aug 2021 and post-Sep 21 respectively. These phases will see a uniform increase in minimum margin collection to 75% and 100% respectively.

How does this new regulation affect the sale of my equity holdings?

In the present scenario if you sell your Demat holdings discount brokers provide you with 100% of the sell amount in your wallet which can further be used for trading purposes on the same day itself. But after the latest regulations on board, only 80% of the sell amount will be available to you on the same day. For example, if you want to sell holdings worth Rs.1,000 then only holding worth Rs. 800 would be available and visible at your end on the same day.

Luckily the next day you will have the liberty of using the entire amount. However, this ease of using the complete amount will be available for a limited period of time. As per the newly introduced regulations, the next day of the transaction will have only 80% of the sell amount available for use in the wallet and the complete i.e. 100% amount will be available to you only when the stock and deductions are settled the day after tomorrow.

These measures will ensure transparency and will give greater authority and transactional abilities to SEBI.

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