SEBI’s New Peak Margin Rules: Securities and Exchange Board of India (SEBI) announced that from 1st September 2021, new Peak margin rules for trading will come into effect in India.
And under the purview of these new rules, the traders will have to deposit a 100% margin with the brokers if they want to trade.
And these changes in the margin rules have been the talk of the town since SEBI announced these margin rules about a year ago. There were trending hashtags like #sebibringmarginback, #notradeseptember, and so on.
So, what are these margin rules, how do they impact the market, who are the affected parties because of the change in the rules and how could these changes be the right step towards a better trading future.
We will try and solve the mystery around these questions through this article.
Let us understand the various phases of SEBI announcing Margin Trading Rules!
In 2020, SEBI had introduced new margin trading rules for day traders whereby, the brokers are now required to collect 100% margin upfront. But with continuous discussions with all the interested parties, these changes in the margin rules were to be introduced in a phased manner.
In Phase 1, traders were required to pay a minimum of 25% margin of the PEAK Margin (between 20% to 30% of the share price) to the brokers
In Phase 2, traders were required to pay a minimum of 50% of the PEAK margin to the brokers
In Phase 3, traders were required to pay a minimum of 75% of the PEAK margin to the brokers
And on September 1, 2021, the final phase of margin has been implemented whereby the brokers are required to take a 100% PEAK margin from the traders.
Why are these changes brought about by SEBI?
There are various factors that contribute to these margin rules, but the following two have to be the prime factors owing to which the SEBI has decided to change the Margin trading rules:
- Transparency. This becomes important because, in the old system of margin trading, all the brokers had different levels of margin for trading and the leverage given to clients differed from the broker to broker and client to client.
And the risk which came along with it was assumed by the broker. But with these new rules of margin trading, there is going to be more transparency as regards the rule of Margin.
- Risk Management: In the old system of Margin trading, there were high levels of leverage being provided to the clients. But, if the market on a certain day had exaggerated movements in the prices, then it left both traders and brokers vulnerable.
Now, the big question which everyone has in mind is, what is this margin of 100% applied on. Is it applied to the share price of the stock? Does it also mean that, if the price of the shares of XYZ limited is Rs. 100, then do I need to have a margin of Rs. 100 in my trading account to be able to trade it.
So, the simple answer to this is “NO”. This Margin limit is applied on the “PEAK MARGIN”. Let us understand the implications:
What is PEAK MARGIN?
Peak margin is the minimum margin that a trader or an investor should maintain either in the form of funds or securities based on all open positions at any given time. It is calculated based on a minimum of 20 percent for stocks and a minimum sum of SPAN and exposure margins for F&O.
So, to put it in simple words, this is the minimum amount of margin that is required to be able to trade that particular stock or security. This margin generally varies between 20% – 30% of the price of the stock. And this is in accordance with SEBI rules.
Now, if you look at the image above, the last value in the image is the Applicable Margin rate and that is also the Peak margin required to trade the share of ICICI Bank. Let us illustrate:
- Say, if the share price of ICICI bank is Rs. 700
- Applicable Margin Rate = 19%
- Then the amount of margin required to trade one share of ICIC bank will be = 19% of 700
= Rs. 133
Before the new rules set forth by SEBI, the brokers would charge sometimes only 5% – 10% of the Applicable margin value. So the amount of money required to trade one share of ICICI bank would be-
= 10 % of 133
= Rs. 13.3
So, by just paying Rs. 13, one could trade one share of ICICI bank (of Rs. 700 per share). A more than 50x leverage.
But, under the new rule of SEBI, one has to deposit the complete Peak margin to be able to trade the shares of that particular company.
Who are the impacted parties because of SEBI’s new Peak Margin Rules?
There are a horde of segments that have been impacted because of these new margin rules. But the two most prominent impacted parties have to be:
- Traders &
The trading community is impacted and is also upset because they will have to deposit the full SPAN Margin and which has ultimately impacted the trading volume. Earlier they could get leverage of sometimes 30x – 50x. But with these new rules, the leverage received will be to the tune of SPAN Margin
The Brokerage community is also unhappy because of these rules because the volume has and will be impacted and which has a direct impact on the volume which they would be earning.
Every big change which impacts the system always is revolted against initially. But if the change is for the betterment of the system, then over the long term these changes do impact the system in the right way.
The New Margin Trading rules by SEBI will be very beneficial to the new investors and traders in the market because they will not be lured into higher leverage and which means they will be able to survive longer with the capital invested.
We hope you liked reading this article and gained a good knowledge of India’s newly enacted Peak Margin guidelines. Please leave your thoughts on SEBI’s New Peak Margin Rules in the comments section below.
Happy Trading and Investing!
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!