Margin requirements in India Stock Market

Published on Wednesday, December 18, 2019 by Team | Modified on Sunday, April 19, 2020

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Margin in the stock market in India is the minimum fund or security an investor must pay to the broker before executing a trade. Margin requirements are set by the SEBI and enforced by the stock exchanges in India. Recently, SEBI has released a circular introducing a few significant changes in the margin requirements in the Indian Stock Market. This article discusses the new margin requirements in trading.

Why margin is required?

Upfront payment of margin is required to mitigate the risk of failure to pay for the shares (or F&O contract) you bought or failure to deliver the shares which are sold through the exchange.

SEBI frequently changes rules margin collection and reporting to fill the loopholes in existing policies and to further enhance the security of funds for investors, brokers and exchanges.

SEBI has also defined strict reporting requirements for stockbrokers to make sure that the client's funds or holdings are not misused by the broker. This includes using the client's surplus fund in the trading account for another client, or by the brokerage firm itself.

Types of Margins in Stock Market

The exchange's risk management system (BSE, NSE) has a range of margin specified for each segment. Some of the popular margin systems used are as below:

  1. VaR Margin
    The Value at Risk (VaR) is a margin intended to cover the largest loss that can be encountered on 99% of the days (99% Value at Risk). For liquid stocks, the margin covers one-day losses while for illiquid stocks, it covers three-day losses to allow the Exchange to liquidate the position over three days.
  2. ELM Margin
    Extreme Loss Margin (ELM) is a second line of defence to cover extended losses that go beyond 99% risk which is covered under the VaR margin.
  3. Span Margin
    Standard Portfolio Analysis of Risk (SPAN) margin is the initial margin paid by the traders to cover 99% value at risk over a one day time horizon. The SPAN margin is for the F&O segment. It varies by the trading instrument and updated daily by the exchange.
    It is also known as the Initial Margin. Read more about it at BSE and NSE.
  4. Mark-to-Market (MTM)- MTM is calculated at the end of the day by comparing transaction price with the closing price of the shares. For example, you purchased 100 shares of a company at Rs.100/- on January 1, 2008. If the closing price of the shares on that day is Rs.80/-, then you are facing a notional loss of Rs.2,000/. This loss is called MTM loss is payable by the next day of the trade. 
  5. Exposure Margin
    The exposure margin is used for F&O contracts of securities as well as indexes in addition to the Span Margin. The exposure margin gives the 2nd line of defence to the risks in derivatives trading.

In addition to these margins, in options contracts, the following additional margins are levied-

  1. Premium Margin- This margin is paid by the buyers of the Options contracts. It is calculated as the value of the options premium multiplied by the number of Options contracts purchased. For example, if you buy 100 call options on ABC Ltd at Rs. 20/-, then the premium margin is 100 X 20= Rs. 2,000.
  2. Assignment Margin- This margin is collected on assignment from the sellers of the Options contracts. It is charged on the net exercise settlement value payable by the traders who are selling the Options.

Margin Requirement

Margins for Cash Market

Margins for F & O (Derivatives)

Margins for Intraday Trading

  1. Value at Risk (VaR) margin
  2. Extreme loss margin
  3. Mark to market Margin
  1. Initial Margin
  2. Exposure margin
  3. Premium Margin
  4. Assignment Margin
  1. Value at Risk (VaR) margin
  2. Extreme loss margin

Margin Requirements for Equity Derivatives (F&O)

SEBI has rules for collecting and reporting margins in the derivative segments (Equity, Currency & Commodity).

All brokerage firms receive a file from the exchange at the end of the day detailing the margins required for positions taken by their clients (SPAN + Exposure).

The brokerages are then required to upload back details of margins available in the client's account. If the available margin is lesser than the exchange stipulated margin, a penalty is levied on the shortfall.

Margin Requirements for Equity Delivery

For buy delivery trades, the customer has to keep the minimum VaR+ELM margin in his trading account. Similar to F&O, the equity delivery margin is also specified by the exchanges daily. The margin varies by stock to stock i.e. on 18th Dec 2019, Axis bank has a delivery margin requirement of 12.5% and Yes Bank has 58.12%.

Most online stock brokers (discount brokers) like Zerodha and Prostocks anyway insist on the entire delivery purchase value to be funded in advance. Thus the delivery margin requirement doesn't make any difference for them.

As of Jan 01, 2019, collecting and reporting margins in the equity (cash) segment becomes exactly like the derivative (F&O) segment. Instead of SPAN + Exposure, the VaR+ELM margin is required to either buy or sell stocks.

This significantly reduces the overall risk and the reporting mechanism ensures that one client's funds can't be used by another client of the brokerage firm itself.

On the sell side, if the broker has PoA on demat, no margin will be required. In case PoA is not given to the broker, the customer has to pay the margin similar to buy transaction before selling stocks. This is to ensure that in case the customer doesn't deliver, there is margin available to make good of any potential auction settlement loss to the buyer.

Margin Requirements for Equity Intraday

Similar to Equity Delivery, Equity Intraday trading requires the VaR+ELM margin specified by the exchanges. This is the minimum amount (not including margin funding) a trader has to pay for intraday trading.

The brokerage firm may offer higher leverage (i.e. 8x) once the requirement of minimum margin is met. The broker has to use its own funds to offer higher leverage. They cannot use other client's surplus funds for this purpose.

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