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What is Peak Margin

17 Jul 2023

Introduction

Margins can be defined as the collateral the trader deposits to their broker to cover the risks that may be generated in the future. A margin is often a fraction of the trading money and is usually expressed as percentages. Margins are the minimum amount of securities or cash (collected as collateral) that must be present in a person's trading account if they wish to make some trade. The main purpose behind margin setting is to ensure that the traders have the cash to back their trades in the stock market.

What is Peak Margin?

Peak Margins came into effect on the 1st of December 2020. SEBI brought it about to bring a higher level of transparency in trade. Peak Margins are the regulated margins introduced mainly to ensure the control on the leverages becomes stricter. Due to the introduction of Peak Margin, most of the excessive speculation also became controlled since the margin started to be collected upfront. Unlike the old way, i.e., at the end position of the day.

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How are margin obligations calculated after the introduction of Peak Margins?

Earlier, the obligation margin was calculated as the trading position percent present at the day's end. After the introduction of Peak Margin regulations, to calculate the clearing corporations, snapshots of four random trading positions are taken by the exchanges and clearing corporations. The highest among those four is considered the Peak Margin of the day. Discover the Margin Calculator and calculate your margins manually.

What are the different phases of Peak Margin?

Peak Margin came into effect in four phases. 

  • The first phase, which lasted from the 1st of December 2020 - the 28th of February 2021, required a 25% Peak Margin.
  • The second and third phases required 50% and 75% Peak Margins, respectively. 
  • The final phase, which started on the 21st of September 2021, requires a 100% Peak Margin.

For the final phase, if a trader wants to trade something worth Rs. 10 Lakhs, he must have the required margin, say Rs. 3 Lakhs, for the trade.

What is the importance of Peak Margins?

  • The earlier system of margin trade needed to be clearer and balanced, which means the traders could buy on credits, and if the margin rate was higher or lower, the buyers needed capital to complete the trade. 
  • The market of margins, hence, created a high-leverage situation.
  • Peak Margins, on the other hand, set strict control on leverage. This was the risk factor for the trader during a trade was impacted.
  • The most valuable part of Peak Margins is that margins are now collected upfront.
  • Peak Margin reduced the risks for brokers.

Why was the reform in margin calculations needed?

Every stock and derivative has a unique margin requirement determined by exchange capital based on volatility. The margin is directly proportional to the market volatility. Brokers used to over-extend their commissions to increase their trades and attract customers. 

Due to this, the trader had access to take high-risk trades with little to no capital. 

Peak Margin regulations proved beneficial for the brokers. Because if the trade went wrong. Then the trader faced big losses, but the broker, on the other hand, vanished.

Consequently, the high-risk bets by traders became a systemic risk for the brokers.

FAQS

1. Can I become a Motilal Oswal customer online?

You can register at the Motilal Oswal website and become our client by opening your account online.

2. How many documents are required to open an account at Motilal Oswal?

To open a verified account, you will need as 

I. Identity Proof: PAN Card 

II. Address Proof: Any recognized national card

III. Bank Proof

IV. Photographs

3. What is the penalty for Peak Margin?

The penalty rate is usually between 0.5% to 5% per day.

4. How to avoid penalties arising from Peak Margins?

The best and most effective way to avoid penalties due to a shortfall of the margins is by adding funds before midnight on the day you want to buy a trade. 

5. What is known as a margin call?

When the trader fails to meet the demands set by the broker and abides by the rules of the SEBI's new rules, the condition is termed a margin call. It can have severe consequences for the trader, as the broker can sell the trader's position even without a margin. The broker can also charge interest and additional fees in the case of a margin call.

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