SEBI Peak Margin Rules: How does it impact Trading? cover

New SEBI Peak Margin Rules is Here: How does it Impact Stock Trading?

SEBI Peak Margin Rules Explained: Last year, SEBI published a circular on margins that astonished the entire trading community along with the stockbrokers. Through this circular, SEBI announced tighter margin norms for the traders that will be completely implemented from August 2021. You can read the whole story about that circular in our previously published article on margin trading new rules here.

In this article, we will further explain what are the SEBI peak margin rules, their phases, and how exactly these rules will impact the investors. This topic has been of prime interest to all the brokers and all those traders who use margin as means of leveraging their position and become a part of the bigger game by using limited capital. However, before we get into the technicalities of SEBI Peak Margin rules, it is of prime importance for us to understand the concept of “Peak Margin”.

What is Peak Margin?

Peak margin is the minimum margin that must be collected by brokers from their clients before they place an order for intraday/delivery purposes. These rules are applicable for both cash and derivatives segments.

The clearing houses randomly take four snapshots at predefined time windows for arriving at the peak margin required for open positions during the day. The highest margins among these snapshots will be the peak margin.

Now, the change in the peak margin rules and their implementation in various phases has been a hot topic of discussion amongst the trading community and all the interested parties. Therefore, it becomes imperative for us to discuss these various phases.

Quick Read

What is SEBI? And What is its role in Financial Market?

Various Phases of SEBI Peak Margin rules

The following are the set of rules which have been set forth by the SEBI regarding the Peak Margin Norms:

  • Phase 1: In this Phase starting from December 2020 and February 2020, it was mandatory that the clients should have a minimum of 25% of the Peak Margin with the broker.
  • Phase 2: In this Phase starting from Mar 2021 till May 2021, the clients needed to have a minimum of 50% of the peak margin with the broker.
  • Phase 3: In this Phase starting from June 2021 till Aug 2021, the clients must have a minimum of 75% of the Peak Margin with the broker.
  • Phase 4: In this Phase starting from Sept 2021, it will be mandatory that the clients should have 100% of the Peak Margin with the broker.

SEBI Office Building | SEBI Peak Margin Rules

Why Sudden Change by SEBI with Peak Margin Rules?

This change in the rules by SEBI is not an overnight decision. These rules have a put forth to make the Indian capital market structure stronger. They want to build a System that guards itself against any fraudulent activities by using excessive leverage.  These new rules have been implemented in a phased-out manner (as explained above) for the same reason.

Now, the brokers who fail to adhere to the minimum peak margin requirement would be fined. These news rules have been designed in such a way so that the maximum leverage that a broker can offer to its client is capped at 20%.

SEBI is also of the view that the margin system should be extremely strong to assess their own risk and take trades accordingly. In a nutshell, SEBI is trying to bring a sense of discipline to India’s whole trading (and investment) system.

Previously, all the margin reporting from the brokers used to happen only at the end of the day for all the carry forwarded trades exected on that day by the customer. Because of these rules, the brokers were able to provide higher leverage in Intraday (MIS), Cover Order (CO), and Bracket Order (BO).

But leveraging comes with its own set of risks, as there could be cases where the customers might not be able to provide margins at the End of the day. And to solve this problem, this new set of rules have been put forth by SEBI.

How do Peak margin rules Impact Traders?

These ‘Peak Margin’ rules are bound to impact the traders who are very active and trade on daily basis. With the earlier rules, they could use the leverage provided by margin trading and could get much higher exposure than what would their capital allow. The margin required was computed only at the end of the session.

But under the “Peak Margin” rules, the amount of funds available to buy the shares on the same day will be much lesser. This is mainly because of the higher-margin required to buy the same amount of shares.

Are the new rules Good/Bad for the Market?

Now, coming to the main point i.e. are the new margin rules by SEBI any good for the market, here are the points to mention:

  • First of all, it is a little premature to say whether it is good or bad for the market as the rules haven’t been completely implemented. But one thing is for sure it will have a direct impact on the volumes in the market.
  • Nonetheless, this new rule will bring a sense of discipline to the market and will also strengthen the safety of the market.
  • Trading with high leverage is also a very risky affair as on a highly volatile day, the whole trading capital could be wiped off from the trading account. But with these new margin rules, there is a safety net around the traders and in an indirect way, the trading careers of small and medium-sized traders will be prolonged.

Overall, the trading volume will definitely be impacted significantly. But the overall trading ecosystem will become safe and secured.

Views of CAPI on the Peak Margin Rules

Recently, CAPI (Commodity Participants Association of India) has requested the SEBI to not increase the Peak Margin required to 75% and to continue with the 50% margin requirement.

“…penalizing the client in such a scenario would be unfair. There is no way for the member or the client to predict market movement and keep margin in advance,” CAPI said. “We, therefore, urge upon Sebi that current level of peak margins (50 percent) margins should stay for times to come or defer the next stage of the peak for time being,”, it added.

They also added that a 50% margin is enough to tackle the situation of volatility in the market. CAPI also concluded by adding that the heading activity will be greatly impacted because of the implementation of new Peak Margin rules by SEBI.


Margin Trading: The New Tighter Rule by SEBI (Dec 2020)!

Closing Thoughts

It is a known fact that embracing changes are always difficult and these change in the rules of Peak Margin are more than likely going to impact the traditional method of Intraday trading (highly based on margin trading).

The volumes are likely to go down and hedging the existing positions can become difficult because more margin will be required to execute trades. But SEBI has its own stance whereby which they want to make the whole ecosystem of trading in India very safe and difficult to manipulate.

We hope you have enjoyed this article and got a decent understanding of newly formulated Peak Margin rules in India. Do let us know what you think of these new SEBI margin rules in the comment section below. Happy Trading and Investing!!

New Margin Trading Rules by SEBI cover

Margin Trading: The New Tighter Rule by SEBI (Dec 2020)!

New Margin Trading Rule by SEBI (Updated): Recently, SEBI published a new circular on margins that astonished the entire trading community along with the stockbrokers. Through this circular, SEBI announced tighter margin norms for the traders. In this article, we are going to discuss what exactly is this new margin rule introduced by SEBI and how it will affect the people trading in the share market.

What is Margin trading?

In terms of the financial market, Margin would be a direct synonym for leveraging. It simply gives you the power to buy/trade in stocks that we can’t afford to buy. Through Margin trading, one is allowed to buy the stocks by just paying the part of the actual value of shares.

The margin can be paid either in terms of cash or in shares as security. The balance amount of shares are funded by the brokers. In other words, Margin simply refers to the amount of money borrowed from the broker to buy the shares of a company. The broker acts as the lender of money and the securities in the investor’s trading account, are kept as collateral.

The margin is settled later when the positions are squared off. We receive profit if we sell the shares at profit or we stand to lose the margin if we make losses.

— How to trade using Margin?

To trade using a margin account, one must have a separate margin account and not the standard brokerage account. A margin account is a separate trading account in which the broker lends money to the investor to buy a security which otherwise he will not be able to buy. The loan or the margin money which is borrowed from the broker comes at a cost i.e., the interest. Therefore, one should use a margin account for short term trading as the interest on the margin money keeps accruing.

Say, if you deposit Rs. 1,00,000 in your margin account and you have a 50% margin in your account, which means buying power of Rs. 2,00,000. Now, if you buy stocks of Rs. 70,000, you still have the buying power of Rs. 1,30,000. And we have enough cash in our margin account to cover the transaction. We start borrowing only, once we have bought shares worth Rs. 1,00,000.

— Three steps in Margin trading

  1. We need to maintain the Minimum Margin (MM) throughout the trading session because volatility in the stocks can push the prices (up or down) more than one’s anticipation.
  2. The position needs to be squared off at the end of each session. If we have bought on margin, we need to sell it off before the end of the day (EOD) and vice-versa if we have sold using margin.
  3. If we want to carry the trade onto the next session, we need to convert it to the delivery trade. And for that, we need to keep the cash ready.

If any of the above three steps are missed then the broker automatically squares off the position in the market.

New Margin Trading Rule by SEBI

The Securities and Exchange Board of India (SEBI) gave out guidelines pertaining to Margin trading (which account for nearly 90% of the daily turnover of the stock market), which has not been welcomed by the brokerage firms with open arms. These rules will put an end to intraday trading and turnover generated out of it.

The brokers have been instructed to collect VaR (value at risk) and ELM (extreme loss margin) upfront from their clients. These rules will be implemented in a phased manner starting in December 2020.

  • Phase 1: From December 2020, the brokers will be penalized if the margin is more than 25% of the sum of VaR and ELM.
  • Phase 2: From March 2021 and June 21, brokers will be penalized if the margin exceeds 50% and 70% of the sum of VaR and ELM
  • Phase 3: From August 2021, brokers will be penalized if the margin exceeds VaR and ELM

Also read: What is SEBI? And What is its role in Financial Market?

Reactions from the Brokerage community

The broking community feels that this will put an end to leverage based intra-day trading. Currently, some brokers collect as low as Re. 1 for every Rs. 100 worth of trade. Here are some of the reactions from Big brokerage houses:

Nithin Kamath, CEO of Zerodha Brokerage Tweeted, “Today’s SEBI circular says that all brokerage firms have to stop intraday leverage products by August 2021 in a phased manner”. In another tweet, he added:

“While many (even we) don’t like restriction on intraday leverages by SEBI, I don’t think any regulator in the world has done so much to protect retail investors. A lot of this slows brokerage business but what is good for the client eventually is good for the business as well.”

nithin kamath on New Margin Trading Rule by SEBI

Jimeet Modi, CEO, and founder of Samco Securities said, “This was expected since last year after the December 2019 circular. Now the industry and exchanges will need to adjust to this new reality. This probably will also accelerate the market share towards discount brokers from full-service brokers. Differentiated margins was a service offering by full-service brokers which has now been arbitraged away. Our estimate is that almost 30-35 percent of the intraday turnover is based on additional leverage provided by brokers. Now assuming full margin is required, total turnover would shrink by approx 20 percent since balance part margin was still being collected from clients.”

How Market Turnover is impacted by new SEBI rule?

On July 21, SEBI gave out a circular pertaining to new rules on Margin trading. And these rules are directly going to impact the market turnover both in the cash and derivatives segment. The cash segment on NSE recorded an average daily turnover of Rs. 50,322 cr (April), Rs. 52,656 cr (May), Rs. 61,395 cr (June). And the derivatives market is nearly 18-20 times the cash market. NSE is the largest derivatives exchange in the world with an average daily turnover of more than rupees 11 lakh crore.

Some of the brokerage houses are of the view, with the new rules if VaR+ELM, the daily turnover may shrink by almost 20-30%. The clients will also have to maintain a higher margin in their account and which will also impact their return on investment. And these changes in rules will not only impact the brokers but will also impact the government, in the form of reduced Securities Transaction Tax (STT).

Search Topic or Keyword
Easiest Stock Screener Tool!

Best stock discovery tool with +130 filters, built for fundamental analysis. Profitability, Growth, Valuation, Liquidity, and many more filters. Search Stocks Industry-wise, Export Data For Offline Analysis, Customizable Filters.

Start your stock analysis journey with Trade Brains Portal today. Launch here!

Best Offers – Instant Demat Account

Zerodha – No 1 Stockbroker in India

Kotak Securities – Trade FREE Plan