SEBI's new margin policy is effective from Jan 1, 2020. With the new changes, no additional leverage can be provided by broker for taking intraday trades whether equity or equity derivatives. SPAN + Exposure for F&O intraday and VaR + ELM for equity intraday, has to be collected upfront before taking a trade. This is applicable for Intraday trades with order types MIS, BO and CO. No changes in equity delivery segment, full amount should be there in your trading account before taking the trade.
With this, now no broker will be able to offer any additional intraday leverage on F&O and equity Intraday trade. In the past, intraday products were offered with additional leverage by the entire brokerage industry. This has to stop going forward.
Lets understand what is margin in detail -
Margins are computed by clearing corporation (NSE Link- and BSE link) upto client level with the help of SPAN (Standard Portfolio Analysis of Risk). Clearing corporation collects initial margin for all the open positions of a Clearing Member based on the margins computed. Margins are required to be paid upfront on gross basis at individual client level for client positions and on net basis for proprietary positions. A Clearing Member collects initial margin from Trading Member whereas TM collects from his clients. SEBI set the rules for margin collection and clearing corporations (stock exchanges) impose them. There are different types of initial margins that needs to be understand by a trader or investor.
The VaR Margin 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 so as to allow the Exchange to liquidate the position over three days.
The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the Member at the time of trade. The VaR margin is collected on the gross open position of the Member. For this purpose, there would be no netting of positions across different settlements.
It covers the expected loss in situations that go beyond those envisaged in the 99% value at risk estimates used in the VaR margin. The ELM is collected/ adjusted from the total liquid assets of the Member on a real time basis. The Extreme Loss Margin is collected on the gross open position of the Member. The gross open position for this purpose means the gross of all net positions across all the clients of a member including his proprietary position.
SPAN (Standard Portfolio Analysis of Risk) is the risk management and margining product used to calculate initial margins on the various positions of market participants. Its objective is to determine the largest possible loss that a portfolio might reasonably be expected to suffer from one day to the next. It then sets the initial margins/ performance bond requirement at a level, which is sufficient to cover this one day potential loss.
SPAN Margin is the part of Initial Margin. Initial margin requirements are based on 99% value at risk over a one day time horizon. However in case of future contracts, the initial margin is computed over a two day time horizon.
The higher of 5% or 1.5 standard deviation of the notional value of gross open position in futures on individual securities and gross short open positions in options on individual securities in a particular underlying. For Index options and Index futures contracts, it is 3% of the notional value of a futures contract.
The open positions of the members are settled on an MTM basis for each contract at the end of the day. The difference is settled in cash on a T+1 basis.
Last updated on 27th Jan 2020
Let’s take an example – To buy one lot of NIFTY futures, you need the entire SPAN + Exposure margin which is 11.5% approx Rs 1.04 lakhs to take a trade. In past broker was offering additional margin for intraday trades (MIS, CO, BO) with up to 33x margin. So now that will be restricted to SPAN + Exposure across the board. No broker can give you extra margin as per SEBI new guidelines.
With these changes, all brokerage firms need to collect upfront margin from clients account described by the exchange. In such a case, now you need an entire margin (SPAN + Exposure in case of F&O and VaR + ELM in case of equity) upfront in your trading account. This will reduce the number of trades which you were taking in past, but this will reduce your risk in case the bid goes against your call. Higher the leverage, higher the chance of panic when trades go against you and higher the odds of losing.
Before SEBI's current circular, brokers were offering higher margins for MIS, CO, and BO. As this trade square off by end of the day itself, the broker need not to report to exchange for such margin and settle the same by end of day.
The brokerage firms who offer higher leverage for intraday trade is going to restrict their clients with exchange required margin. For stock brokers, this has a positive and negative reaction. For the short term, this is going to be a pain as a number of trades are going to be reduced, but positive sign in terms of risk management.
Discount brokers like Zerodha, Upstox, Samco, 5pasia – who were offering up to 33x margin with MIS, CO and BO, now going to offer SPAN + Exposure for F&O, and VaR + ELM for equity.
Full-service brokers (Brick & Mortar brokers) like sharekhan, Angel broking, India Bulls, Edelweiss, Geojit who has branch offices/sub broker offices and allowing the trades without collecting full margin upfront, now need to collect exchange required margin upfront in client's account.