Relief for brokers as Sebi relaxes norms for calculating peak margins

Broker's lobby had requested a change in the procedure for upfront collection of peak margins from clients in both cash and derivatives segment

The Securities and Exchange Board of India (Sebi) has relaxed the norms for calculating peak margins by brokers. In a circular, the market regulator has allowed margins to be fixed at the beginning of the day (BoD), doing away with the earlier requirement changing them frequently on an intra-day basis.

“In view of the representations received from market participants and based on deliberations with various stakeholders, it has been decided that the margin requirements to be considered for the intra-day snapshots, in derivatives segments (including commodity derivatives), shall be calculated based on the fixed beginning of day (BOD) margin parameters. The BOD margin parameters would include all SPAN margin parameters as well as ELM requirements,” Sebi said in a statement.

SPAN is standard portfolio analysis of risk and ELM is extreme risk margin — metrics used to determine the risk to investment for a particular security. The peak margin norms are to reduce excessive leverage in the system and to prevent risk of defaults.

Sebi’s move has been welcomed by the broking community.

“The peak margin rule that was implemented last year restricted brokers' ability to fund clients' intraday positions. In addition to that, the margin requirements are changed up to five times intraday based on the updated NSE SPAN files. So, even if clients pay 100 per cent margin upfront, they could incur heavy penalties based on the updated SPAN requirements during the day. This was a major cause of concern for the traders as there is no way to predetermine how much the SPAN margins can change after trades are initiated,” said Tejas Khoday, CEO, FYERS.

The peak margin norms are being implemented in phases starting December 2020. Between December 2020 and February 2021, traders were supposed to maintain at least 25 per cent of the peak margin. This margin was raised to 50 per cent between March and May. The same has been increased to 75 per until August. And finally to 100 per cent September 1 onwards.

Industry players said a key challenge under this framework, introduced in December 2020, brokers found it difficult to collect margins from their clients based on intraday changes.

Broker’s lobby ANMI had made a submission to the regulator requesting a change in the procedure for upfront collection of peak margins from clients in both cash and derivatives segment.

In simple words, Sebi has now said that any brought forward positions and for positions taken during the day margin to be collected by brokers from clients will be equal to the margin applicable for that derivative contract during the start of the trading day.