Evolving margin rules and it’s impact on Brokers and Trading Clients effective 2 May 2023

Evolving Margin Rules and it’s impact on Stock Brokers and Trading Clients effective 2 May 2023

When SEBI started implementing several new rules through its circulars in 2020, there was a sense of resentment across the broking fraternity. It was felt that the changes would impact business negatively.

In hindsight, we reflect it turned out to be a boon for the industry as well as for market participants. The curb on intraday leverage saved millions of retail participants who entered the market during COVID times from over-speculating. Brokers could no longer give their clients intraday leverage on expiry days. A Peak Margin penalty was introduced to ensure that no client or broker violates the rule. Brokers were not allowed to pass on the penalty to their clients who violated the margin rule. Exchanges started to capture snapshots of the trader’s open position five times a day, and whenever it was found that the trader has a position where the margin used exceeded the available margin, a penalty was levied on the broker.

However, for derivatives trade where margin requirement increases due to an increase in SPAN during volatile trading days, levying a penalty for situations where the broker or client had no control was widely debated. SEBI made modifications to it, in its Circular dated May 10, 2022. The circular stated that the margin requirements to be considered for the intra-day snapshots, in derivatives segments (including commodity derivatives), shall be calculated based on the fixed Beginning of Day (BOD) margin parameters. The BOD margin parameters would include all SPAN margin parameters as well as ELM requirements.

The clients who used to trade based on BOD Margin would not have to worry about the changes in margin due to an increase in SPAN, but on days of volatility, the End of the Day (EOD) margin was higher than the BOD Margin. Thus, the client had to bring in additional margins based on the EOD file. The EOD file used to come at the end of the day, many times client could not provide the margin required on the same day. It resulted in the penalty being levied on the broker.

Assuming, a BOD margin requirement for Bank nifty is 1 Lac and the client has 1 Lac as margin and initiates a buy position in Bank Nifty at 42000. Due to Volatility, the EOD margin requirement increases by 15K while the closing rate for Bank Nifty for the day is unchanged at 42000. In case the client does not meet the additional margin requirement the EOD margin penalty on the shortfall amount of 15K is applicable to the broker.

To further smoothen the process and the operational difficulties, SEBI further modified the framework and brought in another circular on 1st February 2023), implying that effective 2nd May 2023, EOD margin collection requirement from clients, in derivatives segments (including commodity derivatives), shall also be calculated based on the fixed BOD margin parameters.

Thus, for any position created in the Derivatives or Commodities segment, the applicable margin requirement will be based on the BOD Margin, and in case there is any change in margin requirement during the day, no penalty shall be applicable for the trading day. However, the shortfall if any, is not brought in by the next trading day, the penalty on the shortfall amount shall be applicable the next day.

Continuing with the previous example, now the EOD margin penalty will not be applicable for the trading day, however, the penalty becomes applicable if the shortfall amount is not brought in the next trading day before the market opens.

How are we managing this effective 2nd May 2023 at Dhan?
We are in the process of seeking further clarification on the timeline for the collection of the shortfall amount the next day. In the case of clients who trade both in Equity Derivatives as well as Commodities, ascertaining the final shortage amount is possible after the trade process of both the segment is done, which usually happens in the wee hours between 2 AM and 3 AM. Till the time we get clarification from exchanges and Clearing Corporations on this and we make our process based on that, the below-mentioned process is being followed:

a. BOD margin is considered for initiating the position on the trading day both for equity derivatives and commodities segment.
b. We shall not upload any SPAN during the trading day.
c. Next days BOD margin shall be considered for calculating the shortfall if any, for the open position.
d. The Shortfall amount is communicated to clients after the completion of the trade process of the segments (Equity derivatives & Commodities) through email and Notification.
e. The client needs to ensure the shortfall amount is transferred by 9 AM.

These are evolving regulations and as they get implemented, we expect the broking fraternity, including us to continue dialogue and communication with the exchanges, clearing corporations and regulators on ensuring clarity and implementation.

At Dhan, we are always aligned towards bringing you the best possible experience while trading & investing. While we do that, we also have to ensure that we are compliant at all times. If there are further changes or enhancements to the margin rules and its implementation, we will keep our uses posted.

While on this topic, just a friendly reminder - Trade when you find opportunity to trade, not just because the markets are open. It’s important to become a disciplined trader, and at Dhan we encourage our users to use Trader Control’s on Dhan - most comprehensive features and tools any Trader can ask for.

Thanks & Regards,
Jay Prakash Gupta