With market regulator Securities and Exchange Board of India's (SEBI) new margin rules coming into effect, a drastic switch in equity market trading will be seen.
Under this rule, stock market and commodity market brokerages will need to collect a 100 percent margin upfront for trading. This rule will mostly affect intraday traders.
Sebi introduced the rule last year in phases and the final phase comes into effect on September 1, 2021. This was mainly done to decrease the leverage brokers offer their clients. Instead of calculating positions based on the end of the day, this led to them calculating intraday peak positions.
In the new peak margin rules, brokers have to collect minimum margins upfront instead of collecting them at the end of the day, which was the earlier norm.
For instance, a trader wants to take up a position of ₹2 lakh and says the margin applicable on that trade is ₹50,000. The trader will now have to give the entire ₹50,000 before making the trade. This will be necessary for both cash and F&O positions.
The new rule was implemented in phases. The first was in December 2020, when 25 percent of the margin had to be put upfront. Then the second came in March 2021, where 50 percent of the margin was needed upfront. The third came in June 2021 when 75 percent of the margin was collected upfront and finally the fourth was in September 2021 with 100 percent margin collected upfront.
In the final phase of the new norms, brokers will be penalised if they collect less than 100 percent of the margins by the traders.
As per market analysts, this new rule will negatively affect intra-day trading as margins will not be collected at the end of the day. Traders will have to park more money with their brokers for margin requirements now, which may affect the number of trades.
Association of National Exchanges Members of India (Anmi), the association for stockbrokers, has said that this new peak margin rule is unfair and asked the market regulator to reconsider. It also stated that it would not be possible to comply with the new norms.
"The new upfront peak margin essentially requires a trading member to collect uncrystallized and uncertain peak margin from clients in advance. In other words, the trading members are mandated to collect upfront money before clients undertake trades," Anmi said in its letter to market regulator Sebi.
Traders, especially intraday traders are unhappy as they will have to park more money and incur a penalty if the norms are not followed. Both buying, as well as selling shares, will be an applicable margin. Even in order to sell shares, you are holding, the minimum margin requirement has to be fulfilled.
While it was mainly done to protect the traders from the market swings, the new peak margin norms may reduce the liquidity of the market