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What Changes Due to New Upfront Margin Requirements

19 Jul 2023

Margin in stock market parlance is the amount of holding lying in your demat and trading account. The Securities and Exchange Board of India (SEBI) has been introducing trading reforms from time to time, many of which have been around margins. In one such reform, the market regulator introduced an upfront margin. 

What is the New Upfront Margin Requirement?

In a circular dated 31 July 2020, SEBI addressed all recognised stock exchanges and clearing corporations on the subject of collection and reporting of margins trading member (TM) and clearing member (CM) in the cash segment. 

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In this circular, SEBI decided the following –

  • Penalty for short or non-collection of margin will not be applicable if the TM/CM collects the minimum upfront margin of 20% in lieu of Value at Risk (VaR) and Extreme Loss Margin (ELM)
  • The clearing corporation will continue to collect upfront margin from TMs and CMs, which will be based on the VaR and ELM
  • A penalty for short collection and non-collection of upfront margin in the cash segment was put in place from 1 September 2020

The stock exchanges released further clarification on the upfront margin requirement. The key points clarified are:

Capital market – TMs must collect VaR and ELM margins from clients upfront. Other margins, if and when prescribed, have to be collected within T+2 days. 

F&O segment – TMs must collect SPAN and ELM margins from clients upfront, while delivery margin and margin on consolidated crystallised obligation must be collected by T+1 days.

Currency derivatives – TMs would collect the initial margin and ELMs upfront. The margin on consolidated crystallised obligation must be collected by T+1 days. In currency futures contracts, the final settlement would be collected in T+2 days.

Commodity derivatives – Same upfront requirement as currency derivatives. Other margins, if and when prescribed, have to be collected within T+2 days.

What Changes Does this Requirement Bring?

Some of the effects of the upfront margin requirement are:

  • Clients can use 80% of the sale proceeds of their stock holdings immediately and enter new stock or F&O position (s). The entire credit from equity sale proceeds will be available in T+1 days. Apart from the 80% cap, there is a cap on maximum intraday leverage under the new peak margin regime. 
  • Another effect is the possibility of a margin shortfall penalty if the sold equity holdings are bought back after completing another trade in between.
  • Sale proceeds from T1 investments, or the investments made in the previous day and yet to be credited to the demat account, can be utilised for new purchases. 80% of the proceeds can be used to buy new stocks for delivery while 60% for F&O transactions.
  • Intraday profits will be available for new positions only after settlement, which happens the next day.
  • If you exit a long/buy option or buy a write/short option, the proceeds or option premium can be used on the same day, but only on a new long/buy option. It has to be within the same segment. Other segments can be traded in from the next trading day.

Conclusion

If you trade in multiple segments, including F&Os and equities, these requirements are applicable to your trades. The SEBI aims to protect the interest of the investors and regulate the securities market better with such rules and amendments.

 

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