Over the last 12 months, SEBI has been bringing in many additional rules and regulations that safeguard retail customers from any potential financial fraud at a brokerage firm. In this process, many ambiguities in earlier circulars are also being cleared out. While all these have been extremely tough on the brokerage industry in the short term, I think it is good for the ecosystem in the long run.
The most recent circular from SEBI was on margin requirement when buying or selling stocks, which I had explained earlier on Z-Connect. I had explained that it wouldn’t affect our customers, but turns out, it does! NSE and BSE have both just put out guidelines and clarifications on margin collection and reporting in the context of this SEBI circular.
Basically, the clarification says that 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 (MIS, BO, & CO). These type of intraday products were being offered with additional leverage by the entire broking industry until now. This will have to stop going forward.
This means that, for a stock like Reliance, you would need VAR+ELM margin (12.5%) to take a trade. Hence the maximum intraday leverage that can be provided by any broker is this requirement of 12.5% or 8 times. Check this list to see the VAR+ELM margin requirement for all stocks. Going forward, for all intraday product types — MIS, BO, CO trades, the leverage will be the same which is the VAR+ELM margin. Nothing changes for CNC or equity delivery trades that will require full funds in the trading account before placing a buy order or having securities in your Demat account before placing a sell order.
Similarly, to trade 1 lot of NIFTY futures, you would need the entire SPAN+Exposure margin = 11.5% = Rs 1.04 Lakhs to take a trade. And like I mentioned earlier, the margin requirement will remain the same even if you used intraday product types like MIS/BO/CO. Check our margin calculator to see the SPAN +Exposure margin which we also call as NRML margin or Initial Margin.
While the minimum VAR+ELM requirement for stocks is new, the additional intraday leverage that all brokerage firms offered for F&O was due to the ambiguity on margin reporting which existed. Exchanges charge a penalty if there is no minimum SPAN+Exposure present in a client account at the end of the trading day when margins are reported. Since all reporting was done on an end-of-day basis, if brokers did offer higher intraday leverages, it wasn’t reported as long as positions were closed. Thus, there was no penalty and the client who would switch the brokerage firm just based on leverage was happy too. With this clarification, it is now black and white. No broker will be able to offer any additional intraday leverage on F&O.
Who and how does it affect?
Traders who wanted that additional leverage for intraday are the ones who will be affected the most, but positively or negatively is debatable. While yes, every intraday trader craves for higher leverage to earn more, the reality is that trades can go either way. Higher the leverage, higher the chance of panic when trades go against you, and higher the odds of losing. At Zerodha, even though the competitive landscape forced us to offer additional leverage, we have always been among the most conservative brokerages for this same reason.
While this is bad for our business and the industry in the short term, as the trading volumes and revenue may drop, it hopefully will help improve the shallow participation in capital markets bogged down by active traders turning inactive due to trading losses which are potentially triggered by leverage.
Based on this clarification from the exchanges, we will be adjusting the leverages on all our intraday products. MIS/BO/CO for equity will need the VAR+ELM margin and MIS/BO/CO for F&O will require the SPAN+Exposure (NRML) margin.
We have a facility for clients to pledge securities for margin with NCL (NSE clearing corp) which could be used for intraday trading as well. Currently, pledged securities can be sold only after un-pledging which takes 1 day. We will soon allow the selling of pledged securities so that there is no need to wait until they are un-pledged.
Also, there is an overhaul being planned on F&O margin requirements by the regulators. Correctly, the margin requirement for positions that hedge each other is most likely going to drop significantly in the next few weeks. This will be extremely beneficial as it will encourage people to trade low-risk strategies and can potentially attract a newer breed of traders to the markets. We will keep you updated here.
I have answered some of the follow-up queries asked in the comments below on Tradingqna, click here.