Sebi New Margin Rules – 5 Important Points To Know Before You Trade

  • Post last modified:July 29, 2021
  • Post category:Stock Market
  • Reading time:10 mins read
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Sebi New Margin Rules took effect from september 01, 2020 after series of postponed done from last couple of months. Securities and Exchange Board of India (Sebi) has laid down several new rules which as a trader and investors you should know before making any trade in stock market.

We will understand them step by step and in easy language, moreover i will try to make you understand the background of this sebi new rules and its implication in your day to day life.

What Are Sebi New Margin Rules?

1. Collection Of Upfront Margin In Cash and Derivatives:

Let us understand the first and foremost change done by the sebi through this circular, which is related to collection of upfront margin in cash and derivative segments. You can read about how var+elm or span+exposure get calculated here.

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, the calculation to give leverage according to the var+elm is quite cumbersome, as every stock has different var+elm, to make it simple the sebi proposed to collect a minimum of VAR+ELM or 20% of trade value has to be collected from the customer upfront before a trade, even for an intraday trade.

Since almost all stocks have VAR+ELM greater than 20%, this essentially means that the maximum intraday leverage that can be provided for stocks is 20% of trade value or 5X times.

Whereas for FNO you need to pay the entire span+exposure margin, which by the way is total margin require for a carryover position (overnight).

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.

 



 

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 Sep 1, 2020, SEBI has asked brokers to collect margins (VAR+ELM) or 20%  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.

This is because of the peak margin reporting for brokers which will eventually be started from October 2020 onwards.

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 after 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.

So, all in all the margin won’t be a factor to choose the stock brokers for you, it will be the new technology, best customer service, best innovation, advanced trading platforms, lower brokerages and other facilities.

Open best Trading/Demat account within minutes online hassle-free paperless and start investing and trading. 

Let us now move on to other Sebi rules.

2.Intraday Profits To be Used After Settlement:

Before 1 sep,2020, while doing intraday trades the profits earned can be used for taking new positions on the same trading day. However, from now you will be able to use it only after 2 days in case of equity/stocks and the next day in case of F&O.

This happens because the settlement cycle for equity is 2 days and 1 day for F&O. In other words, this is when the profits get credited to your account from the exchange. As an example, intraday equity profits earned on a Monday can be used to trade only on Wednesday, and intraday F&O profits earned on Monday can be used to trade more only on Tuesday.

So, suppose you did a great trade and earned 1000 bucks, till now you could have used it right away to enter into a new positions, but going forward this profit earned will be available only after 2 days in case of equity and 1 day in case of FNO.

Open best Trading/Demat account within minutes online hassle-free paperless and start investing and trading. 

 

 3. Pledge/ Re-pledge For Margin Benefit:

SEBI through this new circular formed a mechanism for pledged and unpledged system which has made the entire process more safe and secure for the customers.

If you are someone who use to take margin by pledging your shares from holding (demat) to trade in FNO,  you had to move it from your Demat account to the broker and in turn to the clearing corporation.

However, moving forward the stock will continue to remain in your Demat account and can be directly pledged to the clearing corporation for the margin requirements.

You need to authorise a pledge request in favour of your broker through OTP based system, which will then repledge it with the clearing corporations for allowing you margin benefit. The shares will continue to stay in your demat account but will be marked pledged.

Every broker will have a different system in place to do this for e.g. with Zerodha the process is very simple, you just need to go to console which is a back office platform and than portfolio, select the stock you want to pledge and enter the share in quantity.

Once that choice is made on the broker’s website, an SMS would be received on the client’s registered mobile number from CDSL/ NSDL acknowledging the chosen securities and quantities and an OTP would have to be generated.

Once the OTP is entered, it is authenticated and the securities are approved for the pledging / re-pledging process on to Trading Member and Clearing Member.

Apart from this there are other benefits too for e.g benefits from corporate actions, such as dividend and right issues, will now be directly credited to the customers’ account which earlier used to come in the demat account of the broker.

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4.Buy Today and Sell Tomorrow (BTST) Trades:

Earlier when you have taken any BTST trades, i.e. you have bought stocks today and going to sell it tomorrow, you could have used the entire margin from this sales proceeds to make other position in stock or fno.

However going forward, you can use 100% proceeds from your BTST trades to take position in equity but only 60% will be available for to trade in FNO. Let me explain this in more simpler way.

We already know under the new margin requirements, a minimum of 20% is required to buy a stock and to sell a stock.

The margin for selling a stock is exempt if the broker can make an early payin to the exchange – which is debit shares from client demat and give to exchange/clearing corporation on same day.

In case of BTST, the shares are still not credited to your demat, which means your broker can’t make an early payin. Which means they need to collect 20% for that sell transaction.

When buying a stock they would have collected 100% money from you, so when you do BTST sell they have to block 20%. Which means 20% for buying and 20% for selling. Hence 40% gets blocked and 60% is allowed for F&O.

If you are still thinking why 60% for F&O and 100% for buying equity stocks?

That is because when buying equity for delivery the minimum required margin is 20%, broker will still have 60%. So they’d be compliant to the new rules.

Open best Trading/Demat account within minutes online hassle-free paperless and start investing and trading. 

 

5.Options Buy/Sell Proceeds:

Earlier if you have either exited (square-off) your long/buy options or made a new option trade by writing(selling), the proceeds (premium in case of selling option or profit in buying option) can be used to trade anything in any segment, stocks, fno, currency etc.

This has now changed now with the sebi new margin rules, proceeds from buying/selling options can be used for only new long/buy option trades on the same trading day and only within the same segment (proceeds from equity options can’t be used for currency or vice versa).

You can use this proceeds or option credit for all other types of trades only from the next trading day.

 



 

Conclusion:

SEBI bought this new margin and other rules to make the system more transparent and less risky for retail traders, this was needed to avoid happening any other karvy like incident in future.

I hope you have thoroughly understood how this rules by sebi will impact you while you are going to trade and invest in future.

Open best Trading/Demat account within minutes online hassle-free paperless and start investing and trading. 

If your looking to invest in mutual funds through SIP than you should checkout Moneycontain Free Monthly SIP Calculator with inflation HERE. 

If you are a beginner in trading and investing, please read this amazing guide on how share market works in India?

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.

If, you have liked the content please do share it with your friends or on social media, as sharing do bring the good karma. If you have any questions or feedback you can leave them in comment box below.

Note: Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only and intended to give information. All investments are subject to risks, which should be considered prior to making any investments.

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