SEBI Peak Margin Rules Explained: Last year, SEBI had published a circular on margin which stunned the stock brokers as well as the entire trading community. Through this circular, SEBI announced strict margin norms for traders which will be fully implemented from August 2021. You can read the full story about that circular in our page.Recently published articles on Margin Trading New rules here.
In this article, we will further explain what are SEBI Peak Margin Rules, their stages and how these rules will affect investors. This topic has been of major interest to all brokers and all those traders who use margin to leverage their positions and become part of the bigger game using limited capital. However, before we get into the technicalities of SEBI Peak Margin Rules, it is important for us to understand its concept. “Peak Margin”.
What is Peak Margin?
Peak Margin is the minimum margin that brokers should collect from their clients before placing orders for intraday/delivery purposes. These rules are applicable for both cash and derivatives segments.
Clearing houses randomly take four snapshots over a predetermined time window to arrive at the peak margin required for open positions during the day. The highest margin in these snapshots will be the peak margin.
Now, the changes in the maximum margin rules and their implementation at various stages have been a hot topic of discussion among the trading community and all interested parties. Hence, it becomes imperative for us to discuss these various steps.
Different Stages of SEBI Peak Margin Rules
The following is a set of rules that are set by: SEBI With regard to Peak Margin Criteria:
- phase 1: In this phase starting from December 2020 and February 2020 it was mandatory that clients should have a minimum of 25% of the peak margin with the broker.
- phase 2: In this phase starting from March 2021 to May 2021, clients are required to have a minimum of 50% of the maximum margin with the broker.
- step 3: In this phase starting from June 2021 to August 2021, clients must have a minimum of 75% of the peak margin with the broker.
- step 4: In this phase starting from September 2021, it will be mandatory that clients have 100% of the peak margin with the broker.
Why the sudden change in peak margin norms by SEBI?
This change in rules by SEBI is not an overnight decision. These rules have been put forward to strengthen the structure of the Indian capital market. They want to build a system that will protect themselves from any fraudulent activities by using extreme leverage. These new rules have been implemented in a phased manner (as explained above) for the same reason.
Now, brokers who fail to comply with the minimum peak margin requirement will be penalized. These news rules are designed in such a way that the maximum leverage a broker can offer to its clients is limited to 20%.
SEBI is also of the view that the margin system should be very robust to assess its risk and trade accordingly. In short, SEBI is trying to inculcate a sense of discipline in the entire trading (and investment) system of India.
|Looking for Best Demat and Trading Account To start your stock market journey? Open your Demat account with No.1 Stockbroker in India – Join +4 million investors and tradersZero brokerage on investments in stocks and mutual funds, instant paperless online account opening. Click Here to Start Now!!|
Previously, all margin reporting from brokers was done at the end of the day for all carry forward trades required by the client on that day. Due to these rules, the broker was able to provide higher leverage in intraday (MIS), cover orders (CO) and bracket orders (BO).
But leverage comes with its own risks, as there may be cases where clients may not be able to provide margin at the end of the day. And to solve this problem, this new set of rules has been put forward by SEBI.
How do Peak Margin Rules Affect Traders?
These ‘peak margin’ rules are bound to affect traders who are very active and trade on a daily basis. With the earlier rules, they could use the leverage provided by margin trading and get much higher exposure than their capital allowed. The margin required was calculated at the end of the session itself.
But under “peak margin” rules, the amount of money available to buy shares on the same day would be much smaller. This is mainly due to the higher-margin required to buy the same amount of shares.
Are the new rules good/bad for the market?
Now, coming to the main point i.e. any good margin rules for the market by SEBI, here are the points to mention:
- Firstly, it is a bit too early to say whether this is good or bad for the market as the rules are not fully implemented. But one thing is certain that it will have a direct impact on the volume in the market.
- However, this new rule will bring a sense of discipline in the market and will also strengthen the security of the market.
- Trading with high leverage is also a very risky affair because on a highly volatile day, the entire trading capital can be wiped out from the trading account. But with these new margin rules, there is a safety net around the traders and indirectly, the trading careers of small and medium sized traders will last longer.
Overall, trading volume will certainly be affected significantly. But the overall business ecosystem will become safe and secure.
Views of CAPI on Peak Margin Rules
Recently, the CAPI (Commodity Participants Association of India) has requested SEBI not to increase the required peak margin to 75% and continue with the 50% margin requirement.
“… it would be unfair to penalize the customer in such a scenario. There is no way for the member or the client to anticipate the market movements and keep margin in advance,” said CAPI. Hence, we urge SEBI that The current level of peak margin (50%) should remain for the time being or the next phase of the peak should be postponed for some time.
He also said that 50% margin is enough to deal with market volatility conditions. CAPI also concluded that the headline activity would be greatly affected due to the implementation of the new peak margin rules by SEBI.
It is a known fact that changes are always difficult to accept and these changes in peak margin rules are more than likely to affect the traditional method of intraday trading (highly based on margin trading).
Volume is likely to be low and hedging existing positions may be difficult as more margin will be required to execute trades. But SEBI has its own stand whereby they want to make the entire ecosystem of business in India very secure and difficult to manipulate.
We hope you liked this article and have a good understanding of the newly formulated Peak Margin Rules in India. Let us know what you think about these new SEBI margin rules in the comment section below. Happy Trading and Investing!!
Save up to 90% on brokerage charges
Trade Brains Recommended Top Brokers for Demat & Trading Account Opening in India
Hitesh Singhi Is an active derivatives trader with +10 years of experience of trading in Futures and Options in Indian Equity Markets and International Energy Products like Brent Crude, WTI Crude, RBOB, Gasoline etc. It is traded on BSE, NSE, ICE Exchange and NYMEX. exchange. Hitesh holds a graduate degree in business management and an MBA in finance, by qualification. connect with hitesh Twitter Here!
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of knews.uk and knews.uk does not assume any responsibility or liability for the same.