Margin Requirements In Indian Stock Market
Last Updated: Jan -21-2020
Trading in the Indian stock market is not as direct as investor’s money directly being invested into various companies’ stocks and the investor getting his returns after a stipulated period of time. There is one person who links the investors with the companies – the broker. The broker does the main work of analyzing the market and making profitable investments on behalf of the investor. Hence, to pay him back for his duties there is an additional amount that comes into picture. It is commonly known as Margin, which is the minimum fund or security that an investor pays to the broker before starting to trade.
These margins are neither decided by the investor nor by the broker. The margin requirements are set by the Securities and Exchange Board of India (SEBI), which is applied across all the stock exchanges in India. In this blog, we will understand all about the margin requirements applicable in the Indian stock market.
Significance of Margin
Trading is filled with risky situations and to avoid any unpleasant situations, upfront payment of margin is necessary. This mitigates the risk of failure to pay the shares the investors buys, or failure to deliver the shares that are sold while trading. Based on the trading experiences and reports from the stock exchanges, SEBI frequently changes the margin requirements, collection and reporting policies. The ultimate intention is to secure the funds for not only the investors but also the brokers and exchanges.
Just like margin requirements are designed to safeguard the interests of brokers and stock exchanges, SEBI also have defined strict policies for stockbrokers to safeguard investors funds or holdings and prevent their misuse. For instance, a broker uses the investor’s surplus amount for another investor or even for himself.
Types of Margins
SEBI has defined margins for every segment making all the policies clear for investors, brokers and stock exchanges. Below are the types of margin systems one must know of.
- VaR Margin - VaR stands for Value at Risk. This margin covers the largest loss that can be encountered on 99% of the trading days. For liquid stocks, the margin covers one-day loss while for illiquid stocks it covers 3-day losses.
- ELM Margin - ELM stands for Extreme Loss Margin which acts as the second defence cover extended to cover losses which are included in the VaR margin.
- SPAN Margin - SPAN stands for Standard Portfolio Analysis of Risk, also known as the initial margin, that trader has to pay upfront to cover 99% value at risk over a one-day time horizon. It is specifically for the F&O segment and various according to the trading instrument. The margin is updated every day by the stock exchanges.
- Mark-to-Market (MTM) Margin - MTM is calculated at the end of every trading day by comparing the transaction price of the shares with their closing price. For instance, if you have purchased 150 shares at Rs 150 today, and the closing price of the shares is Rs 120, then you have incurred an MTM loss of Rs. 4500 which is to be paid by next day of the trade.
- Exposure Margin - In addition to SPAN margins, the F&O contract of securities and indexes uses exposure margin. They also act as a line of defence for derivative trading.
When it comes to options contracts, there are two additional types of margins applicable.
- Premium Margin - Premium margin is calculated as the value of options premium multiplied by the number of options contracts purchased. For example, if you purchase 200 call options at Rs 40, then the premium margin is Rs 8000.
- Assignment Margin - This margin is collected on assignment from the sellers. It is charged on the net exercise settlement value payable by the traders who are selling the options.
If we have to segregate the types of margins according to the market, then the following will be the division.
|Margin Types for Cash Market||Margin types for F&O (Derivatives)||Margin types for Intraday Trading|
Now that we have understood that different types of margins, we will now study the margin requirements in detail specific for different trading segments.
Margin requirements for Equity Derivatives
- Derivative segment includes equity, currency and commodity
- All the brokerage firms get a file from the stock exchanges that mentions the details of margin collection from the client
- The brokers must then fill in the details of margins that are available in the client’s account.
- If the available margin is lesser than exchange stipulated margin, then a penalty is applicable
Margin requirements for Equity Delivery
- For Buy delivery trades, the customer has to keep the minimum margin which is the sum of VaR and ELM in his trading account
- Instead of SPAN and Exposure margin, VaR and ELM margin is required to buy or sell stocks
- The equity delivery margin is specified daily by the exchanges
- Margin may vary from stock to stock
- Online stockbrokers like Zerodha and Prostocks do not apply any margins since they request for the entire delivery purchase value to be funded in advance
- As of Jan 01, 2019, collecting and reporting margins in the equity/cash segment is same as the derivative F&O segment
- For Selling stocks, if the broker has a Power of Attorney (PoA) on the Demat account, then no margin is applicable
- If the PoA is not given to the broker, then the customer has to pay the margin similar while buying stocks. This ensures that if the customer is unable to deliver, then margin is available to settle the loss incurred by the buyer
Margin requirements for Equity Intraday
- Intraday trading also requires a minimum margin which is the sum of VaR and ELM margin as specified by the stock exchanges
- Once the minimum margin is obtained, the brokerage firm may offer higher leverage
- In that case, the broker has to use his own funds while offering higher leverage and cannot use the client's surplus funds for this purpose.
Margin requirements are set by SEBI for investors as well as brokers to ensure that any loss incurred must be settled by fair means. This way although trading will continue to have its ups and downs, the seller and the buyer will always get their returns, ensuring a satisfied trading experience.
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