SEBI Latest Circular On Intraday Margin In Cash and FNO From August 2020

  • Post category:Stock Market
  • Reading time:14 mins read
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  • Post last modified:January 6, 2022

It may sound a bad news initially for intraday traders due to SEBI Latest Circular On Intraday Margin In Cash and FNO from 1 August 2020.

So, here is what has happened till now, on November 19 2019, SEBI through this circular on Collection and reporting of margins by Trading Member (TM) /Clearing Member (CM) in Cash Segment, which was scheduled to take effect from Jan 1st 2020 have asked brokers to pay the margin upfront.

Which means, entire initial margin which is SPAN+Exposure for F&O, and VAR+ELM for equity, has to be collected upfront before taking a trade, even if it is an intraday trade including (MIS, BO, & CO).

These type of intraday products were being offered with additional leverage by the entire broking industry until now.

However, this was postponed after the request received to sebi by various brokers and broker association ANMI asking for time to implement, SEBI understand the concerns raised by the the brokers association and forward the date of implementation of circular to April, 1 2020.

Now, due to the ongoing impact of CORONAVIRUS and sever lockdown in entire country it was next to impossible to get this implemented, so SEBI kept on increasing the date every month until July 30, 2020. 

However,  SEBI have now came up with the new clarification on circular related to the intraday margin in cash and FNO segment. Here is the SEBI Latest Circular On Intraday Margin In Cash and FNO.

Before we understand how this is going to impact every broker, trader and even exchange at some level, we first need to understand the basics. Let us check them one by one.

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What Does SEBI Latest Circular On Intraday Margin In Cash and FNO Means?

In simple terms it means the margin or leverage that many brokers used to give it to their clients for intraday products such as in equity cash segment or futures and option segment will be exponentially reduced.

How and at what extent the margin will be cut, in order to understand that we first need to know how margins are calculated.


How Margins are Calculated In Equity Cash Segment? 

Margins in Equity Cash Segment calculated based on VAR (Value at Risk) and ELM (Extreme loss margin), let us know more about it.

What is VaR+ ELM Margin?

VaR (value at Risk) margins cover the largest loss incurred on 99% of the days, as defined by the exchange while ELM (Extreme Loss Margins) is adequate to cover losses beyond those considered under VaR.

Basically, stock volatility and liquidity majorly affect VaR and ELM calculations. In simple words now you have to pay this margin ie. VAR+ELM in advance or upfront to your broker in order to take any position or trade.

Another thing is your broker cannot use or give you margin from their fund, it has to be your money.

Check out the below image as an example to know the VAR+ELM margin requirement of certain stock, you can also check the complete VAR+ELM list here.


What Does SEBI Latest Circular On Intraday Margin In Cash and FNO Means?


Now, let’s look at this with an example. Suppose you want to buy AXIS Bank shares of Rs 1 lakh, for that you will have to pay Rs 40,000 as VaR + ELM(40%), depending on volatility and liquidity of the stock and not to forget, the same rule applies to sales transactions as well.

Similarly for Asianpaints the margin requirement is close to 16%, so you have to pay Rs.16000 upfront to take the position in market.

This means as an intraday trader the leverage that you were getting earlier through different orders such as CO,BO will end. Yes, you will still get the margins but only to the extent of VAR+ELM.

Earlier, 50% of the VaR+ELM+Adhoc in MIS orders and 25% for CO/BO mandated by the exchange that is why the margins were reduced to take the position.

Will discuss the impact later, let us now see what happens in case of FNO.

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How Margins are Calculated In Derivatives Segment?

When you trade in derivative segment you need to pay the Span +Exposure margin, which is nothing but the initial margin you need to order to take a position in market.

What Is SPAN + Exposure Margin

Total Margin (Initial Margin) = SPAN Margin + Exposure Margin

SPAN (standardized portfolio analysis of risk) Margin is the minimum requisite margins blocked for futures and option writing positions as per the exchange’s mandate.

The ‘Exposure Margin’ is the margin blocked over and above the SPAN to cushion for any MTM losses.

Both the SPAN and Exposure margins are specified by the exchange.

In other words, SPAN margin is an initial margin which is calculated basis the risk and volatility of the underlying whereas the exposure margin is like an adhoc margin calculated on the value of the exposure taken.

The SPAN margin for a particular security keeps changing from time to time based on the volatility of the underlying whereas the Exposure margin usually remains the same since its basic function is work as an additional safety net and it is not the initial margin requirement in itself.

The Exposure Margin for a Index contract is 3% of the total value of the contract, determined by SEBI. For example, if the size of a contract is 5,00,000 (₹5 lakh) the Exposure Margin will be 15,000.

For option contracts and Futures Contract on individual Securities i.e stocks it is higher of 5% or 1.5 standard deviation.

Let us understand how this new sebi circular will have an impact in intraday FNO trades. Check out below image i have used zerodha FNO Calculator to check out the margin requirement to sell 1 lot of Nifty.

Buying the option does not require margin as you already pay the full premium to take the position.

How Margins are Calculated In Derivatives Segment?
As you can see SPAN+EXPOSURE margin required to sell 1 lot of NIFTY is around Rs.1,46,910, till now you have to pay only certain percentage i.e
Index F&O
4.16X(24% of NRML margins)
Stock F&O
3.33X(30% of NRML margins)


However, after the implementation of the circular you have to pay the entire margin to take the position, so whatever you were paying to take the carryover(overnight) position similar amount you now need to pay upfront to even take a intraday trades in fno in both index and stocks.

So, just like in equity where you have to pay VAR+ELM in FNO you have to pay SPAN+ EXPOSURE margin upfront for all futures and short options trades, before a trade.

I hope you now have better understanding of how this SEBI Latest Circular On Intraday Margin In Cash and FNO will going to impact everyone. Now let see the date of implementation and how it is happening.


When And How SEBI Latest Circular On Intraday Margin In Cash and FNO To Be Implemented?

As a trader if you have enjoyed the leverage provided to you by your broker don’t worry you will still be getting the same margin till 1,Dec 2020. The SEBI new clarification on the circular states the implementation will be done in phased manner.

Dec 2020- Feb 2021: Penalty if margin used <25% of VAR+ELM

Mar 2021- May 2021: Penalty if margin used <50% of VAR+ELM

June 2021- Aug 2021: Penalty if margin used <75% of VAR+ELM

Aug 2021 onwards: Penalty if margin used < VAR+ELM

Until Dec 2020 nothing changes. Post that every 3 months, intraday leverages or margin keep reducing and post Aug 2021, there will be no additional margin apart from VAR+ELM for equity and SPAN+EXPOSURE for FNO.

From Aug 1, 2020, SEBI has asked brokers to collect margins (VAR+ELM) for trading stocks, similar to SPAN + Exposure for F&O. However there won’t be any penalty as such for the brokers until 01,Dec 2020.

So most probably the brokers might still provide you the same margin till 01,Dec 2020, post that the margin will get reduced systematically at every 3 months and on 01, Aug 2021 you would require to pay the full margin.

So, Yes still lot of time has been given to the brokers by SEBI to implement the circular, let see how the brokers cope up with this as a process.

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My Opinion On SEBI Latest Circular On Intraday Margin In Cash and FNO:

If you ask me as a trader and investor, yes the impact will be huge in short term but at the end of the day I must admit taking high leverage or margin is not the right form of trading. High leverage itself means more risk, it is just like taking loan from someone which you need to pay.

Moreover most of the newbie traders who enter in to the world of stock market, usually blow up their trading account within couple of days and week.

I have a friend who work for a broking company, that broker gives highest leverages to its clients, he told me one day, the average account opened in his company is 1000/day, 30K in a month, however out of surprise less than 3K account remain active after a month.

Which means most of the traders lose his money in intraday trades and stop trading within a month or so. See, you need to understand trading is a zero sum game, it is not wealth creation but transfer of money from one person to another.

Most of the retail traders does not have enough knowledge at first place, moreover they see that with just 10K in his trading account he can easily take a trade worth 4 Lakhs (40x MARGIN), If you think rationally, can you imagine the risk on the trade seeing the volatility in the market.

Taking a limited leverage within a range 4 to 5X times is more than enough, most trader think to get rich within a day, which is not the right way to trade at all.

You may think oh common I earn regularly in intraday trading and find leverage the best thing, but when you say that you need to account the newbie traders, That new trader if losses all his capital he will never going to come back to stock market, which by the way was meant for growing your wealth through investing.

Money is equally important to everyone and should be used logically. You may also think SEBI or even for that matter government does not want retail traders to be part of stock market, which is totally wrong. The margin are getting reduced to safeguard your money.

Because,  30-35 percent of the intraday turnover is based on additional leverage provided by brokers, this means after the implementation of this circular the brokers as well as exchange will going to incur a loss, due you really think this is what they want to do.

You have to look at entire picture not just the one part while thinking of this as something negative.

In my opinion, as a trader one should always use as less margin as possible and please avoid the brokers who offers you  60, 70, 100X margin, when you see such brokers look at their brokerage and other charges in your ledger or contract notes which you rarely see, you will get surprise for sure.

Any which ways the capital at stake is of yours whether it is in form of loan given to you by your broker. Suppose you have 5 lakh rupee in your trading account will you going to use entire capital of yours in just one trade??

Most importantly once this circular gets implemented, the level field will be equal for brokers, which means now they have to offer you the best technology like trading platform, mobile apps, best customer service, best innovation, less brokerage instead of just the leverage.

Overall, yes this SEBI Latest Circular On Intraday Margin In Cash and FNO might impact all of us at one level, but this was much needed to safeguard the traders as well the overall market participants.

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Please do not just speculate while trading in stock market in any segment, instead look for learning new strategies based on different technical tools and indicators.

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