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.
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.
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.
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!!
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!