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How will peak margin affect my margins for trading in the derivatives segment

01 Jun 2023

What is the Impact of the Peak Margin on My Margin for Trading in Derivatives?

The impact of the peak margin on your trading margins in the derivatives segment is based on several factors, such as:

  • Initial margin 

  1. You are required to deposit an initial margin with your broker when you initiate a position in a derivatives contract.
  2. This initial margin is a percentage of the contract value and acts as collateral against potential losses.
  3. Peak margin regulations may require you to maintain a higher initial margin during trading hours.
  4. This affects the amount of leverage you can utilise and consequently, your trading margins as well.  
  • Additional margin

  1. Exchanges or brokers may require additional margin payments to cover potential losses when the financial markets are volatile or positions are adverse. 
  2. Peak margin regulations can influence the amount of additional margin you may have to deposit.
  3. This can impact your trading margins and potentially restrict your trading activity if you don't maintain sufficient funds or collateral.
  • Position liquidation

  1. If your account fails to meet the peak margin requirements, your broker or exchange may take action to liquidate your positions partially or entirely.
  2. This can lead to forced position closures, potentially resulting in losses or missed trading opportunities.
  3. It is important to understand and monitor peak margin requirements to avoid such situations.
  • Market volatility

  1. Peak margin regulations are often implemented during periods of heightened market volatility to mitigate risks.
  2. During such times, exchanges or regulators may increase margin requirements to account for the increased potential for rapid price movements.
  3. Higher margin requirements can impact your trading margins and may necessitate additional funds or collateral to maintain your positions.

 

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What is the Impact on Different Transactions or Exposures?

The impact on different transactions or exposures is as follows:

  • Intraday transactions

  1. The maximum exposure for intraday in the derivative segment is restricted to 1x.
  • Hedge margin trades

  1. Hedging strategies in margin trades used to be advantageous for customers, as they could benefit from margin requirements.
  2. However, the rules have changed. If you decide to close your hedged position, it is important to close the leg of the transaction with the higher margin requirement first.
  3. Failing to follow this sequence can result in a significant increase in your peak margin requirement. 
  4. Not having a sufficient margin may lead to a penalty.
  5. Let's consider an example to illustrate this. Suppose you have only Rs. 50,000 as the available margin. You buy 1 Lot of NIFTY 13,000 CE for a price of Rs. 20 and simultaneously sell 1 Lot of NIFTY 13,200 CE. The margin requirement for the NIFTY 13,200 CE position is approximately Rs. 25,000 - Rs. 30,000. Now, if you decide to square off the NIFTY 13,000 CE position first, the margin requirement for the NIFTY 13,200 CE position will increase to Rs. 1,35,000. As you only have Rs. 50,000 as a margin, there will be a shortfall, and you will incur a penalty as a result.
  • Increase in exchange margin throughout the day

  1. Exchanges may release updated span files, which can lead to an increase in margin requirements due to market volatility. 
  2. It's important to stay aware of these updates because if your account doesn't have sufficient margin as per the latest span file, you may be subjected to a peak margin penalty, which you will be responsible for covering.

Conclusion

  • It is crucial to stay informed about the specific regulations, margin requirements, and updates from your exchange or broker.
  • To navigate the potential impact of the peak margin on your trading margins, regularly monitor your account balances and leverage ratios, and maintain sufficient funds or collateral to meet the peak margin requirements. 
  • Consider implementing risk management strategies, such as setting stop-loss orders and diversifying your positions, to protect your margins and mitigate potential losses.

 

 

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