SEBI New Rules For Intraday Margin From December 2020 Explained

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  • Post last modified:January 7, 2022

From 1 December 2020 SEBI new rules for intraday margin in cash and derivatives taking effect finally after more than a year from the date of announcement of this circular on November 19 2019.

Lot of time has been given to the brokers by SEBI to implement the circular as this was about to take effect first from January 2020, however it got postponed as the brokers were denying it due to infrastructural and technical issues.

Later SEBI decided to give some more time and it was supposed to start from April 1, 2020, but due to the Coronavirus pandemic it again brought down without implementation.

On July 20, 2020, SEBI released another circular on framework to enable verification of Upfront Collection of Margins from Clients in Cash and Derivatives segments.

In this it guided brokers about how the implementation of SEBI new rules for intraday margin from 01, December 2020 in cash and derivatives will take place.

Later on July, 31, 2020 another circular related to Peak Margin Reporting for brokers which stated that From Sep 1, 2020, brokers need 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.

You can read in detail about What is VAR+ELM and What is SPAN+Exposure? here.

So, this was the background of what’s happening, having said that you do not need to go to read every circular, below i have explained them in great detail step by step.

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What Are SEBI New Rules For Intraday Margin?

The crux of the matter in simple terms is 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 (Equity, Currency, Commodities) segment  will be exponentially reduced.

Why because of the peak margin reporting system, we will understand that later for now let us see what are rules that are laid by SEBI for brokers and how this will impact you as a intraday trader.

As of now you as an intraday trader might have enjoyed higher leverages offered by many stock brokers, there was no limit as a matter of fact few brokers which I do not want to name have have been giving out 200 to 300 times leverage in equity and up to 100 times leverage in fno.

So, instead of offering advanced or best trading platforms, lower brokerages, better customer service experience or easy online user interface to clients they were selling margin as feature. 

Can you believe the risk in this not only from the broker but from a trader perspective, it is a systemic risk for entire industry. In order to control that fanatic SEBI has to come out with these kind of stricter restrictions.

Which says going forward i.e. from December 01, 2020 to September 2021, in a phased manner the margin will get reduce systematically. Here are the details for the same:

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, 01 2020 nothing changes, after that every 3 months intraday leverages or margin keep reducing and post September, 01, 2021, there will be no additional margin apart from VAR+ELM for equity and SPAN+EXPOSURE for FNO.

The 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). Having said that there is still plenty of time as this will be done in phased manner, so let us understand what happens during different phases.


Different Phases And Its Impact On Margin:

As per SEBI guidelines, there are are four phases and during every phase the margin will increase gradually otherwise the penalty will be levied on the brokers who do not follow this rules. Let us see the phases and impact on margin during same.

Phase 1st (Dec 2020 to Feb 2021): In first phase SEBI has asked brokers to collect a minimum of 25% of the funds on the prescribed limit if they want to offer intraday trading across cash and derivatives segments.

  • For Equities, it would be 25% on Var+elm or 20% of the traded value(whichever is lower).
  • For FNO (writing/shorting), it would be 25% on the SPAN+Exposure.

Note: For buying options nothing changes.

Phase 2 (Mar 2021 to May 2021):  The minimum margin the broker has to collect while entering a position is 50% of the prescribed limit.

Phase 3 (Jun 2021 to Aug 2021): The minimum margin the broker has to collect while entering a position is 75% of the prescribed limit.

Phase 4 (Sep 2021 onwards): The minimum margin the broker has to collect while entering a position is 100% of the prescribed limit.

Which in simple term means:

Maximum of 20 times until Feb 2021

Maximum of 10x from Mar to May 2021

Maximum of 7x from Jun to Aug 2021

Maximum of 5x from Sep 2021 onwards

Above are rough estimates only, it may be more or less similar. check the complete VAR+ELM list here. With 10x leverage, if you have 10k in your account your purchasing power becomes 100k, with 5x leverage it comes down to 50k, so you will have to adjust accordingly.

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Margins will increase for Option writing as well, margin requirements will be as below:

  • 25%(4X) of the SPAN + Exposure margins until Feb 2021
  • 50%(2X) of the SPAN + Exposure margins until from Mar to May 2021
  • 75%(1.33X) of the SPAN + Exposure margins until Jun to Aug 2021
  • Full SPAN + Exposure margins from Sep 2021

From 1st Dec 2020, intraday FnO positions needs a margin requirement of 25% of 1L, which is 25,000 for intraday FnO position. This requirement goes-up to 100% of FULL span + exposure margin or full 1L from Sep 2021.

Keep in mind this also applies to Currency and commodity derivatives as well. Let us now talk little about peak margin reporting which eventually lead to this margin reduction.

What Is Peak Margin? 

Till now margin reporting used to happen only at the end of the day for all the carry-forwarded trades executed by the clients on that particular trading day. Brokerage firms were allowing their clients to take intraday positions with margins far lesser than VAR+ELM or SPAN+Exposure.

However with peak margin reporting system enabled brokers who used to provide higher leverages by offering products like intraday (MIS), cover order (CO) and bracket order (BO), as this types of orders get squared off before the close of trading hours, due to which there were no margin penalty on the end of the day open positions will come to an end.

Earlier brokers used to ask for lower margins from the prescribed limit of VAR (Value-At-Risk) + ELM (Extreme Loss Margin) for equities and SPAN + Exposure for F&O for creating an intraday position for their customers.

For example:

  • If Asian Paints VAR+ELM is 20%, Instead of asking Rs 20,000 for a Rs 1L Asian Paints intraday trade (MIS, CO, BO), some brokers would ask for only 2% or Rs 2,000.
  • If Nifty futures or option writing required SPAN+Exposure of Rs 1.5L, brokers would allow customers to trade intraday with say just 5% of this amount or Rs 7500

Note: There are no changes for margin in hedging of derivatives, it would be same as of now.

There were brokers who allowed writing Nifty, bank nifty with just Rs.2500 as well (guess name in comments), which by the way is already a leverage product and many of them allowed buying or selling stocks by giving more than 200x times in margin.

SEBI is trying to reduce the risk that overleveraged naked positions have in the system.

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The NSE, in a circular on Thursday, said clearing members are required to report end-of-day and peak margins, according to the file downloaded by the clearing corporation.

In case of any shortcomings in reporting, the same will be considered as shortfall in margin collection, and a penalty will be levied and collected from the clearing member of the custodian participant. The objective of the peak margin is to reduce the leverage given to clients in derivatives.

High margins have created a risk at the broker’s end as there were cases where the clients would not able to cover up the margins at the end of the trading day, thereby creating a shortfall.

In order to handle this risk, SEBI has now mandated all brokers to report the margins randomly couple of times during the day as compared to just once at the end of the day.


Impact Of SEBI Latest Margin Rules On Traders, Brokers And Market:

Let’s talk about the impact on traders first, for those who used to enjoy such high leverages while doing trades they may need to slow down a bit. Not great news for such traders the impact costs will increase leading to have more money in your trading account for placing such trades.

Having said that, if we talk about the positive side with less margin the risk of losing more money in a single trade will also reduce, moreover for traders in FNO instead of just writing naked options better hedging strategy will be learned and applied as the margins requirement for hedged position have already been brought down.

Even with 5X leverage (applicable from 01, September, 2021) your Rs.1000 is equals to Rs.5000 which means you still can buy decent amount of shares. 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?

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.

Another thing is with rising competition in broking industry instead of just leverage as a feature now most of the brokers will offer better deals to customers in terms of account opening fee, annual AMC charges, lower brokerages, good trading platforms, better customer service etc.

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If we talk about the impact on brokers, it will be huge specially for those brokers whose only agenda was to manipulate first time traders by offering high leverage as something exceptional feature.

They now have to either offer other services such as better platforms for ease of doing trades without much problem, good quality support and customer service team, and most importantly lower brokerages or have to shut down their broking business.

Sorry for being blunt but this is what it is, they now have to realize to start thinking from a customer point of view. overall the revenue for such brokers or for that matter most of the discount brokers will come down significantly over a period of 1 year.

On positive side the brokers will not have to deal with clients who default on payments due to high margin and need to collect the money by sending them legal notices and follow ups. Chances of a broker going default will also come down.

Moreover, demand for hedges would create extra volume and revenue for the broker which in turn have a positive incentive towards reducing the leverage offered thus reducing risk for broker, client and overall system.

Especially after the issues at Karvy, BMA, the SEBI have tried bringing strict rules in last 1 year to make trading and investment more transparent such as stopping the mandate use of POA (Power of Attorney) is one of them.

If we talk about stock market and the impact of SEBI new rules for intraday margin yes the volumes may come little down both in cash and derivatives segment.

Also, the liquidity might be effected for a limited period of time, because when we talk about things like volume and liquidity people do not understand that number of people who use to trade and invest is also keep on rising.

Specially due to the latest WFH (work from home) culture the number of participants in stock market have surged big time. Let me show you the recent data for the number of investors rose in last 11 years, specially the rise in market participants during 2020.


What Are SEBI New Rules For Intraday Margin?


The number are still very low when you compare it with 1.3 billion population, with more digitalization and telecommunication (thanks to JIO) knowledge towards stock market will increase which inherently will lead to more market participants than now in future.

So, liquidity and volume is not much of concern from my point of view in long term.

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People must understand that main aim of trading should be reducing and managing the risk and not making profit. If risk is managed properly, profits will automatically come as by product.

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.

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.

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.

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.

This move needs a warm welcome as it is a try to make system better for everyone in long term.

You can read about SEBI other rules and regulation bought for BTST trades, Pledge-Repledge system here.

You can also see my review on Zerodha, Upstox, ICICI Direct, 5Paisa.

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.

This Post Has One Comment

  1. varaprasad

    what a wonderfull words . trader become a invester . starting starting no one become good investore . u and sebi saying single word saving retailers( no thats not true ) retailers know buying only but big players have a great knowledge and money they can easily manpulate the stocks. in future no one entered in share market this is true. first of all this is not gambling sebi this point not understand so thats why putting restrication so tell me one thing if iam invest 10lakhs in reliance +10 lakhs in lupin +10 laksh hindpetro+20 laksh in hdfc bank. so now tell me my porfolio is good ?ican make money monthly ? if u tell me i will wait 5 years this stocks give me 1 lakh profit. yes no one can say that this is the best. because every were risk . first u have to educate the people not getting bullshit rules. if u had this rules last 15 yers back now no one dont no the what is share market. sebi put phase manner but in single day sebi bring eductional works no.

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