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What is the impact of new SEBI circular on overnight margin collection for derivatives?

From July 1st, 2018, for any overnight positions, clients need to maintain both SPAN + exposure margin in their account. Previously SPAN margin amount was mandatory for overnight positions, but with new changes with SEBI Circular, now client need to manage both SPAN + exposure margin.

Let’s take an example – For buying one lot of NIFTY Future SPAN = 40,000 and Exposure Margin= 25,000

So in earlier scenario client need to maintain only 40,000 in his account, but with new changes, he needs to maintain 65,000 in his account.

Pros:

  • This process will bring standard practice in the brokerage industry, previously some brokers were only taking SPAN margin and very limited % of exposure margin, now this will set a standard in the market for all brokers to maintain SPAN + Exposure margin.
  • More margins collected mean lesser risk for the broker as well as exchange. This is a good scenario when the market is very volatile and create a big damage to Broker.

Con’s:

  • Increase in shot margin penalties, as traders will take some time to digest this process.
  • Traders need to put more money overnight, so this will decrease the volume in derivatives trading.

Will this change impact Intraday Trades (MIS/CO/BO positions)?

By rules, this is not impacting Intraday margin, circular is only for NRML/overnight positions , but this can indirectly affect the Intraday margin. Let see how…

Previously Total margin requirement for overnight position was = SPAN (40K) = 40K

New Changes in Total margin requirement for overnight position is = SPAN + Exposure Margin (40K + 25K) = 65K

For Intraday positions, previously broker need to safeguard with SPAN margin amount but when we see Intraday scenario, broker is giving you up to 60% and asking clients to bring 40% of SPAN + Exposure margin, As this trade will square off by EOD, in this example broker was asking 25K from you and keeping 15K from his pocket to execute this trade with exchange.

As now broker needs to keep 65K with exchange form intraday trades also, you will see slight changes in Intraday margin policy. Zerodha has increased his number from 40 to 50% now, where SAMCO was previously giving 2x margin.

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