What is Peak Margin? Know more about SEBI's New update (framework).

Economics 10 December 2020 3:35:PM

Peak-Margin-Updates

From December 1, the peak margin principle will be implemented in the derivatives segment in a staggered manner in which the clearing company will equate the intraday position of the client with the available margin. Any inadequacy would be viewed as non-compliance. But before all that let's know What is Peak margin? 

What is Peak Margin?

“Peak margin” is the collective reporting of client margin across various segments. (And, those segments are EQUITY, F&O Equity, F&O Currency, and F&O Commodity) by stockbrokers during the day based on the peak theory. The clearing arms of stock exchanges send four snapshots of broker- and client-wise trading positions based on which highest margin has to be considered for payment. The clearing arms of stock exchanges send four snapshots of broker- and client-wise trading positions based on which highest margin has to be considered for payment. These snapshots will be totally random & system driven (not at fixed times). The issue here is that such a practice is resulting in chaos as it so happens that several clients square-up their entire position before the market closes, popularly called “intraday”, but given the random snapshots due to ‘peak margins’, clients are getting into the SHORTFALLS because of leveraged intraday positions. Since intraday constitutes close to 70% of average daily turnover, the rule is looked at with much displeasure.

What is New Update On Margine Rule by SEBI? 

SEBI has been trying to find solutions with some perennial issues in recent years like network effects of one failure on others, and then there was the severe discomfort with the extremely high percentage of derivatives turnover versus cash in the books. Derivatives are a synthetic instrument, it has attracted not only strategy based players but also heavy speculation by retail investors. To control this, SEBI has been increasingly raising margins and the size of the contracts but this effort was neutralized as brokers gave ever-increasing multipliers to counter it. This had given rise to a non-uniform playing field & thereby giving rise to systemic risks for brokers who had taken the risks on their books.

The spirit that SEBI wants to embed in the stock market community is that of “Leverage only to the extent that is palpable by an individual &/or entity”. Thus the new regulations would provide a level playing field across the broking industry so as to limit the multiple exposures that may be allowed. This would in a way reduce excess SPECULATION to a greater extent, as also RISKS involved with the leverage.

The percentage of delivery trades to actual turnover normally played on an average between 27-35% over the current FY. This in a way indicates that out of the business transacted on a single day, around 70% was settled intraday. This was the function of excessive intraday multiples (Read exposure) that some brokers use to provide the clients. With the new regulation, there is a good chance that the participants are driven to genuine investment trades as against speculation trades. It is also positive for the intraday trader, as the probability of intraday traders winning will improve with lower leverages.

There also seems to be a directional focus of SEBI moving to the T+1 settlement cycle. Across all the pointers that have come through, there seems to be a good amount of stress that has been put on “EARLY PAYIN” (EPN).  By doing the early paying, one can save a lot of hassle as well as utilize the margins more efficiently.  This seems to be an early pointer that finally culminates in the moving of the settlement cycle to T+1.

 We have collated the structure of the regulation in subsequent pages. 

We list the pointers to changes that may happen because of this:

  • Intraday – Proper margin has to be there. No broker can offer 10x, 20x, 30x, and thus there would be a LEVEL playing field across the broking interfaces.
  • Intraday Option Selling – especially on Thursdays (when the options were set to expire) will be affected a big way.  Given that movement in underlying (read predominantly in the Indices) for a single trading day may not exceed a few percentage points & generally in single digits, brokers were allowing leverage even to the extent of 50x or 100x of the collateral. This preposition will cease given that the peak margin snapshots will curb the excesses.
  • SELL transaction from Demat  – Only 80% from Sell Proceeds can be utilized for further exposure. Earlier participants would toggle between & churn their holdings in a sine-die fashion, thereby reutilizing the collateral for bigger leverage. This will be curbed with limited manageability.
  • BTST – 40% (20% + 20% is blocked. The second 20% can be released with EPI): Earlier this was a very popular transaction type where traders use to BUY today & SELL tomorrow. The cycle used to continue with the second BUY on the same day using the proceeds of SELL transactions of the day.
  • Hedged Position – Always EXIT both positions at a time. If not, EXIT high margin position first e.g.
  • A BUY/SELL futures first vs a hedge in the form of BOUGHT option: Futures always carry a higher margin compared to a hedge position of a BOUGHT option. Hence Futures leg of the hedged position to be squared first.
  • SOLD option first vs BOUGHT options. SOLD options always carry a higher margin compared to the hedge position of a BOUGHT option. Hence SOLD option to be covered first.
  • CREDIT of DEMAT Sell not to be used for any other trade if one buys it back intraday. The 20% lock has put in a spoke to the transaction in a BIG way. The same is the case with MTM profits. Earlier the MTM profits were used for further leveraging.
  • Intraday Peak Margin & EOD Margin are different. One needs to have both. There is no escape from the dual reporting.

PEAK MARGIN STRUCTURE

With reference to SEBI circular: reference number SEBI/HO/MRD2/DCAP/CIR/P/2020/127 dated 20th July 2020, Peak Margin would be introduced in Equity, Commodity & Currency segment from 1st December 2020.

Following are the guidelines for the collection of upfront margin & Peak Margins from clients in Cash & Derivative segments: -

Brokers need to collect upfront margins in the form of funds/securities by way of Fund transfer or Margin Pledge (Specifically read as Clear Funds &/or Securities) to execute any transactions.

Until now, the reporting for margin requirements happened on the basis of end-of-day positions. Based on these positions, the exchange was imposing a margin on the customer.

Under peak margin reporting, CC shall send 4 Snapshot in a day on scheduled time (In a random, system driven process). At the end of the day, Exchange will consider the maximum margin across that 4 snapshots/Margin files for any client which will be considered as Peak Margin.

We (GEPL) have to report the margin collected from each client as at EOD and the peak margin collected during the day.

  •  EOD margin obligation of the client shall be compared with the respective client margin available with the TM/CM at EOD.
  •  Peak margin obligation of the client/TM/Custodial Participant, across the snapshots, shall be compared with respective    client/TM/Custodial Participant peak margin available with the TM/CM during the day

Higher of the shortfall in collection of the margin obligations at (a) and (b) above, shall be considered for levying of penalty as per the extant framework.

In the cash market, the peak margin will be applicable till T+2 until pay in for the delivery positions.

The above framework will be prescribed in the phased manner as below:

  • Phase-I : (1st Dec 20 to 28th Feb 21) : -  penalty if margin blocked is less than 25% of the minimum 20% of trade value (VAR+ELM) for stocks or SPAN+Exposure for F&O.
  • Phase-II: (1st March 21 to 31st May 21): - penalty if margin blocked less than 50% of the minimum margin required.
  • Phase-III :(1st June 21 to 31st Aug 21): - penalty if margin blocked less than 75% of the minimum margin required.
  • Phase IV: (1st Sept Onwards): - penalty if margin blocked less than 100% of the minimum margin required.

The penalty in case of margin shortfall penalty structure has two slabs:

Short collection for each client Penalty percentage
(< Rs 1 lakh) And (< 10% of applicable margin) 0.5%
(=> Rs 1 lakh) Or (= >10% of applicable margin)

1.0%

Note:- In cases where there is short/non-collection of margins for more than 3 consecutive days or for more than 5 days in a month, a penalty of 5% of the shortfall amount shall be levied. GST@18% shall be applicable to the penalty amount

FAQs Annexure A (dated 27/11/2020 issued by the Exchanges)

Whether early pay-in (EPI) of securities accepted by clearing corporation (CC) during the day can be considered as upfront/peak margin for the said sale transaction?

Yes, in respect of the sale of shares by a client for which EPI has been accepted by CC, the same may be considered as margin collected towards peak margin for the said sale transaction. Clarifications with respect to EPI, as mentioned in the 1st bullet point of question no. 03 in Annexure A of the Exchange circular NSE/INSP/45191 dated July 31, 2020, has been partially modified as under.  In respect of the sale of shares by a client for which early pay-in (EPI) has been accepted by CC and credit entry is posted of the sale value of the shares in the ledger account of the client, EPI value may be considered as margin collected towards subsequent margin requirement of the client.

Is upfront/peak margin collection required to be done in respect of clients who have done early pay-in of securities to pool account of Trading member/s?

No. Trading Member shall not be required to collect upfront/peak margins, in respect of positions for which early pay-in of securities is made by the clients in pool account of the trading member on the date of execution of the transaction.

What changes for clients at GEPL?

GEPL has always believed in long term relationships that look to create wealth for the client, rather than juicing the client to generate revenue alone. In this regard, we have always believed in INVESTING in companies rather than playing on the prices in stipulated time. A long-term portfolio generally creates real wealth with a number of multi-bagger stocks generating real WEALTH. In the true sense & logic of this hypothesis, GEPL has never allowed leveraging beyond the real means of a client. Hence we feel that other than the operational changes like EARLY PAY-IN (EPI) or no- use of transit FUNDS till actual SETTLEMENT has occurred, the normal transactions would be affected to a greater extent.


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