The capital market regulator Securities and Exchange Board of India (SEBI) has amended the margin rule in the commodity segment also to increase liqui
The capital market regulator Securities and Exchange Board of India (SEBI) has amended the margin rule in the commodity segment also to increase liquidity. It did after the increased limit of upfront margin in the equity segment.
With an upfront margin requirement, the stockbroker can ensure that the trader has adequate funds to face any potential loss. As we know, intraday trading is all about identifying sudden and significant price swings that may create unfavorable situations. Thus, the new structure of margin trading will help to strengthen the safety measures in the markets.
- The revised margin requirements introduced by SEBI will limit investors’ risk by restricting stockbrokers from rendering excessive leverage.
- Under the ‘Peak Margin’ system, brokerages have to provide margin details at least four times to the clearing corporations within a trading session. Therefore, they cannot misuse the upfront margin by cross-payments.
Thus, revamped margin trading rules are in the interest of investors, and it’s time to step up the margin trading with a low brokerage trading account.
If you use the leveraged funds cautiously without unnecessary excessive usage, your trade positions can favor you. It may be that the new margin structure impacts trading volume initially.
but over a period of time, it will return to normal levels as traders need to get used to the new system. If you are an experienced market participant, you can open a trading account with hi-tech facilities to make quick intraday trades.
Here are the details of SEBI’s new margin trade rules.
Upfront Margin Rule
Before the revamped margin requirements, the traders need to pay the margin at the end of the trading session after closing the trading positions. It was a risk for the investor as the trade may result in heavy losses also, and if it is a margin trade, it can magnify much more.
But after the implementation of new rules, the trader needs to pay the margin upfront. It will save them from heavy losses as they can leverage the position up to a limit as per available funds.
In March 2021, the SEBI increased the upfront margin limit up to 50%. And now, after increasing the margin limit to 75% in the 3rd phase from Jun-Aug. SEBI has said that, in the fourth phase, Sep 2021 onwards, traders will have to pay a 100% margin. It will save brokers from the default risk by the trader.
As they can ensure that the trader has sufficient funds to meet the margin even if the trade does not favor them. Traders will also be bound to take a minimum risk and save themselves from huge unseen losses.
Peak Margin Rule
Before the reformed rules, margin details of all trades executed on a trading day. It provides by a brokerage at the end of the day, except squared-off ones. Such margin computations at the end of the day help brokers to provide higher margins to their clients.
But under the new ‘Peak Margin’ structure, brokerages are bound to report margin details many times within a trading day. Clearing corporations will take a minimum of four snapshots of all margin status before closing the trading session.
The highest margin among all snapshots would be the ‘Peak Margin’ for that trading day. After that, the paid margin by the investor will be matched with the peak margin requirement. In case of any shortfall, the brokerage is liable to pay the penalty.
Now onwards, traders need to create a pledge to use their demat securities as collateral against margin trading. Earlier, it was done through Power of Attorney signed at the time of opening a demat and trading account.
It was a risky zone as traders have imparted the rights of using their demat securities to the broker. Brokerages can misuse it easily. For a more secured system, the SEBI has introduced the pledging system.
Under the new framework, day traders can collateralize their demat shares after a proper client authorization only. The client will verify the process through an OTP. This step will undoubtedly strengthen the risk management in margin trading and make the markets more efficient in the long run.
What is the reason behind the sudden change in the margin system?
You should note that such reform is not an overnight manner. SEBI implemented the new framework in different phases. The first phase was Dec 2020 – Feb 2021, when the margin limit was raised to 25%. Then, in the second phase, in March 2021, the margin requirement increased to 50%.
The third phase is between June and August when the margin limit has been increased to 75%. And now SEBI is ready for the fourth phase (September onwards) to increase the margin requirement by 100%.
Thus, on a positive note, you can make a move towards margin trading.