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As an Indian investor, you must be eager to step into the stock market to explore different financial instruments. There is a high chance that you have already come across the term- peak margin. But what is peak margin? Why is it important in your investment journey? This post will help you unravel the meaning of peak margin shedding light on its importance in the financial landscape of India.
To put it simply, peak margin is the maximum permitted limit of intraday trading exposure an investor may get from a broker. It refers to the highest security or fund amounts that one may use for trading intraday. It occurs without bringing extra capital to the trading account. Comprehending the meaning of peak margin is essential as it impacts the ability to utilise and execute intraday trading effectively.
What is Peak Margin?
The concept of peak margins emerged on December 1, 2020. The Securities and Exchange Board of India introduced the SEBI peak margin to induce a high transparency level in the trade. Peak margins or regulated margins help to ensure that the control over leverages becomes more rigid. As a result of Peak Margin’s implementation, most excessive speculation was also curbed because the margin was now collected up front. as opposed to the previous method, which was at the end of the day.
Example of Peak Margin
Let’s illustrate this concept through an example –
Suppose you’ve taken a long position in Nifty with an initial margin requirement of ₹ 1,30,000. However, later in the day, the exchange raises the margin requirement to ₹ 1,40,000. In such a scenario, the system will initially check if you have an additional ₹ 10,000 available. If you do, this amount will be blocked based on the updated span files processed in our trading systems during the day. On the other hand, lacking this additional margin leads to a SEBI peak margin shortfall, and the exchange will impose a penalty.
For instance, if you only have ₹ 1,30,000, a peak margin penalty of ₹ 50 (0.5% of ₹ 10,000) will be applied.
Why is Peak Margin Important?
Traders and investors can purchase assets on credit by using margin. The trader needs less capital to execute a deal when the margin requirement is less. As a result, a high-leverage situation was established.
Peak Margin was implemented to impose more stringent limitations on leverage, which affected the amount of risk a trader may accept for a position. Because the margin is collected up front rather than at the end of the day, Peak Margin has also been able to rein in excessive speculation. Due to this setup, speculative traders with limited money cannot increase their positions during the day.
What are the Different Phases of Peak Margin?
The SEBI peak margin was implemented in four stages.
- A 25% peak load pricing and marginal cost was needed for the first phase, which ran from December 1, 2020, to February 28, 2021.
- The second and third stages needed 50% and 75% peak load pricing and marginal cost, respectively.
- A 100% Peak Margin is needed for the last phase, which began on September 21, 2021.
In the last stage, a trader has to have the necessary margin—let’s say ₹ 3 lakhs—for the deal to trade anything worth ₹ 10 lakhs.
What Do Experts Suggest?
Due to several factors, markets require healthy cash market volumes. First, because it is smaller than the derivatives market, the cash market carries less risk regarding intraday trading. In derivatives, the minimum lot size is between ₹5 lakh to ₹10 lakh.
Second, the cash market’s intraday volumes give more significant delivery deals and much-needed liquidity. It offers depth in the market for any institutional buying or other important volume purchases in delivery. A low volume of exchanges extracts that liquidity from the system. The buying and selling of huge quantities are directly impacted by a lack of liquidity, which is bad for growth.
If the cash market turnover remains stagnant even in a bull market, the impact could aggravate during the downturn.
While peak margin norms are a step in the right direction, they have not achieved the intended outcome. In this scenario, SEBI and the stock exchanges should relook at the exposure being provided in the cash segment vis-à-vis the derivatives segment.
There are several options offered by regulators, such as:
- Reducing the intraday cash segment margins while maintaining a separate margin for cash and derivatives.
- Keep derivatives at one time only and raise the trading limit from one to 1.5 times the cash margin or two times the cash margin.
The aforementioned actions might continue to monitor the risks and preserve systemic liquidity while adhering to the goal of reducing speculation. In general, authorities must tread carefully to manage risks without impairing market growth and liquidity.
How Does The Peak Margin Rule Affect Investors And Traders?
Under the former arrangement, certain brokers offered leverage that was up to six times the investor’s initial deposit. This implied that you might have trading exposure of up to ₹6 Lakhs with an investment of ₹1 Lakh. It is simple to understand how high the risk is regarding speculative trading and how much the broker would lose in the event of a default.
However, as of late, the peak load pricing and marginal cost are established at the start of each trading day, and trade requires a 100% margin to be placed. For example, if you want to purchase stocks for ₹1 Lakh with a ₹25,000 margin, you must provide the entire ₹25,000 as the required advance margin to trade. Additionally, you must keep your account balance adequate to meet the peak margin requirement, if not exceed it.
There may be a “peak margin rule penalty” for noncompliance. In percentage terms, this sum is determined as the real shortage. If the deficiency is less than ₹1 lakh, the penalty usually is 5% and 10% of the relevant margin. If the sum is ₹1 Lakh or over, the penalty rises to 1%. A penalty equal to 5% of the shortfall for each day, beginning on the third day of the shortfall, will be imposed for continuing deficiency margins for more than three days in a row.
To sum up, the SEBI peak margin regulation was implemented to increase the Indian stock markets’ stability and transparency. It seeks to do this by encouraging brokers and traders to engage in ethical and responsible trading practices and by lowering the risks involved with intraday trading. Individually speaking, to trade, you must now provide 100% of the margin as capital and ensure that the minimum balance is kept to avoid paying the peak margin penalty.
The peak margin penalty is a fee stock exchanges impose on stockbrokers when their clients fail to maintain the required peak margin. This penalty is calculated as a percentage of the margin shortfall. Typically, the penalty is 5% for shortfalls below ₹1 lakh and 10% for amounts equal to or exceeding ₹1 lakh.
The broker is obligated to report any shortfall in collecting peak margins from clients.
The broker is responsible for reporting the peak margin shortfall and paying the penalty on the deficit. The penalty ranges from 0.5% to 5% of the shortfall amount daily.
Currently, intraday checking is unavailable as exchanges provide this data at the end of the day with the final client-wise maximum peak margin requirement.
Since intraday and square-off trades attract peak margin requirements, the peak margin amount will be debited from your bank account and released the following day.