Understanding common instances of margin shortfall and penalty.
Margin penalty is a penalty imposed by the exchange when a position is held without sufficient margin. It is levied on intraday position as well as overnight positions. Here, we discuss several possible scenarios of Margin Penalty and ways to avoid such penalties. Let’s begin.
From December 01, 2020, peak margin requirement shall also be considered for computation of margin shortfall and penalty (refer SEBI circular dated July 20, 2020). Higher of the EOD shortfall and peak margin shortfall shall be considered for levying of penalty. Stock exchanges give 5 Risk parameter files during the day at specific time intervals. Your available margin might be sufficient enough at the time you executed trade. But the possibility here is, the stock price might see a significant upswing or downturn after your trade, causing the margin requirement to increase. So, it could be possible that you had taken a position with sufficient margin but subsequently margin increased due to which there could be a margin shortfall and a penalty shall be charged thereon.
Example: - Suppose client A has Rs.5,00,000 margin in his account and taken a buy position in XYZ futures in morning, say at 11:30 AM with an intention to carry the position. Per lot margin (SPAN Margin + Exposure Margin) as per the latest Risk Parameter file of the day was Rs.4,80,000. Here, the client had sufficient margin to take the position.
Given the heightened volatility in the stock price the margin requirement shot up to Rs.5,20,000 during the day (as per the Risk Parameter file of the day). As per the EOD Risk Parameter file of the day per lot margin stood at say Rs.4,90,000. The exchange would check sufficiency of margin against higher of peak margin and EOD margin obligation. In this case, broker would report margin shortfall of Rs.40,000 (available peak margin Rs.4,80,000 – peak margin obligation Rs.5,20,000) and on which margin penalty shall be levied by the exchange.
Per SEBI guidelines, if a client pledges stock to avail margin, the stock values are reported to the exchange at the previous day's closing price. However, on the trading platform, free margin is calculated on a real-time basis. Thus, if the stock that you have pledged shoots up by 10%, your free margin will also increase accordingly, allowing you to take more positions based on the increased collateral value. Because the reporting has to be done based on previous day closing prices, the client's available margin would be less than his margin obligation, leading to a margin shortfall.
Example: - Client A has pledged 1000 shares of XYZ (Rs.700 per share) and availed margin against it. The broker would give a margin of Rs.5,25,000 after applying a haircut (e.g., 25%) for trading. During the day, stock price shot up by 10%, accordingly client’s margin also increased to Rs.5,77,500.
The client places a buy order for 1 lot of XYZ futures (per lot margin say, Rs. 5,60,000). The order would be successfully executed due to the increased collateral value. However, at the EOD, the broker would consider Rs.5,25,000 for reporting purpose leading to reporting shortfall of Rs.35,000 (available peak margin Rs.5,25,000 – margin obligation Rs.5,60,000) on which margin penalty shall be levied by the exchange.
The client is mandatorily required to maintain a minimum 20% upfront margin before executing the trade in the equity cash segment. All other margins applicable (like Adhoc Margin, Delivery Margin, MTM Losses, etc.) have to be paid by the client within 2 working days from the trade date (i.e., T+2 day). If the client fails to fulfil the other margins by T+2 day, the same shall also result in a levy of penalty as applicable.
Example: - Let’s say Client A has Rs.50,000 margin in his account and he bought XYZ stock worth Rs.1,50,000. Given below are the details.
|Scrip Name||VaR + ELM||Adhoc Margin||Buy Value||Upfront Margin||Adhoc Margin||Total Margin (VaR+ELM+Adhoc)|
The client had sufficient margin on T - day, so he executed trade and there will be no margin shortfall on T - day. Here, in the XYZ stock 35% Adhoc margin is applicable which needs to be fulfilled by T+2 day. Hence, the total margin requirement which needs to be fulfilled by T+2 day is Rs.91,500. If he fails to fulfil this margin obligation by T+2 day, the same shall result in a margin shortfall of Rs.41,500 and a penalty thereon.
A client can avail margin against only those stocks which are lying in his demat account and are free from any lien (i.e., unencumbered stock). Such stocks need to be pledged with the broker to avail margin against it. Stocks lying in Client Unpaid Securities Account (CUSA) are also considered for trading limit and margin reporting. Hence, the client would be able to trade basis the margin available against stocks lying in CUSA. The next day the stocks shall be moved from CUSA to the client’s demat account and until and unless those shares are pledged with the broker, will not be considered for margin reporting and trading limit as well. This shall result in margin shortfall and appropriate penalty thereon.
Example: - Client A is having Rs.3,00,000 margin in his account. He purchases shares of XYZ company worth Rs.2,80,000. Until settlement completes on T+2 day the stock remains in CUSA. The client has a credit balance so his purchases would be transferred to his demat account on T+2 day.
Since the stocks lying in CUSA are considered for trading limit, from T+1 day the client would be able to take positions against stocks lying in CUSA. Suppose on T+1 day he bought 1 lot of BANKNIFTY futures, the margin of which is say, Rs.1,50,000. On the T+2 day that XYZ would be transferred to the client’s demat account. Now, the client is left with no margin against the open position of BANKNIFTY futures. Assuming Rs.1,60,000 to be the margin for BANKNIFTY futures at EOD on T+2 day, Rs.1,60,000 would be the margin shortfall on which an appropriate penalty shall be levied by the exchange.
BTST stands for Buy Today Sell Tomorrow. You might ask do I also need to provide a margin for selling stocks that I had bought yesterday or selling stock from my demat account? The answer is Yes, the margin requirement is applicable for both “Buy” and “Sell” transactions in Cash segment. The client is mandatorily required to maintain a minimum 20% upfront margin before executing the trade in the equity cash segment. This margin requirement remains untill settlement completes on T+2 day. The client’s failure to fulfil the upfront margin requirement for selling stock shall result in a levy of penalty.
Example: - Client A has Rs.60,000 margin in his account and he bought XYZ stock worth Rs.2,00,000. Let’s say the margin applicable (VaR + ELM + Adhoc margin) is 25%. The next day the stock price went up by 5%, and he intends to sell the stock. Given below are the details.
|Available Margin on T - day||Rs.60,000|
|Margin requirement on T - day (Buying stock)||
Rs.40,000 (20% of Rs.2,00,000)
Rs.50,000 (25% on T+1 & T+2 day)
|Margin requirement on T+1 - day (Selling stock)||Rs.92,000 (20% of Rs.2,10,000 + Rs.50,000)|
|Available Margin on T+1 day||Rs.60,000|
|Margin Shortfall on T+1 day||Rs.32,000 (Rs.92,000 – Rs.60,000)|
Only cheques which are cleared would be considered as margin collected. If after the margin reporting by the broker, the cheque is dishonored (i.e., returned/ bounced) or not cleared within T+5 working days, then the broker would report to the exchange client’s revised margin after excluding the effect of such dishonored cheques. The penalty would apply if there were insufficient margin in the revised reporting after considering the effect of such dishonored cheque.
It is important to note here that the penalty will be levied with retrospective effect, i.e., from the first day/instance of the margin shortfall.
The following penalty shall be levied in case of short margin reporting per instance.
|Short collection for the client||Penalty percentage|
|(< Rs. 1 lakh) And (< 10% of applicable margin)||0.5%|
|(≥ Rs. 1 lakh) Or (≥ 10% of applicable margin)||1.0%|
If short collection/ non-collection of margins for the client takes place for more than 3 days in a month, then penalty of 5% of the shortfall amount shall be levied for each day during the month beyond the 3rd instance of shortfall.
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We hope this blog post has helped you learn about Margin Penalty and ways to avoid such penalty. If you have any questions regarding your financial matter, please feel free to contact us.