SEBI rules around margin requirement: What is peak margin? We explain

Vimal Joshi
Updated: 14 Dec 2021, 03:31 PM IST
TL;DR.

The markets regulator rolled out the last phase of margin requirements which include peak margin rules. Let us decode the rules for you

Margins allows traders and investors to buy positions on credit and get exposure to a much higher value of trade.

Margins allows traders and investors to buy positions on credit and get exposure to a much higher value of trade.

The last phase of SEBI's peak margin rules was rolled out on September 1, 2021. The margin rules are meant to curb excessive intra-day speculation which involves high-risk, particularly in the futures and options (F&O) trading. These rules were introduced in multiple phases starting December 1, 2020.

What is peak margin?

To make sure that the buyers of security have enough balance in their trading account to be able to do a trade, stock markets mandate traders to keep ‘margin’ money. And as per the latest SEBI rules, the margin that the investors require will be calculated on the basis of the largest value of their purchase during the trading day – and not only during the end of the day.

It is different from the earlier rules when the margin would be calculated based on the closing position at the end of the day.

Significance of peak margin?

Margins allows traders and investors to buy positions on credit and get exposure to a much higher value of trade than the available funds allow. When the margin requirement is 20 percent, a trader can buy a position which is five times the amount of cash in their trading account.

So, lower the margin requirement, the higher can be the risk in holding a position. And higher the margin requirement, the lower would be the leverage.

The erstwhile rules allowed traders to maintain end of day position, and the traders could take riskier positions with limited funds during the day. They would then reduce their positions towards the end of the trading day to adhere to the margin requirements.

Now, this would not be possible any more.

The maximum leverage which a trader can now take would be determined on the basis of the largest value of position taken during the day, and not at the end of the day.

To make sure that traders are following the peak margin rules, the brokers will now be supposed to check their clients’ positions at least four times during the day. And out of these four positions, the largest exposure will be used to calculate the margin requirement.

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Latest peak margin rules defined by SEBI 

So, if you are a trader and are accustomed to keeping highly leveraged positions, then you may now need to increase the amount of capital in your trading accounts to execute the same amount of trade.

So, we can summarise that peak margin rules introduced recently would prevent traders from maintaining highly leveraged positions and intraday speculations during the day.

 

First Published: 14 Dec 2021, 03:31 PM IST
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