New Margin Framework- All queries answered!

There’s been a lot of queries & misconceptions about SEBI’s new circular of upfront margin requirements for trading stocks and F&O, and intraday leverage. It has been assumed that clients will not be able to use proceeds from selling stock holdings to buy other stocks on the same day. A buzz is also there about the postponed collection of short margin penalty for delivery stock trades to start from Sept. 01, 2020, by SEBI.

SEBI’s circular also emphasises on the minimum margin requirement for stocks from the client can be 20% of the trade value instead of VAR+ELM, which means the brokerage firm constructs up for the difference between this 20% and VAR+ELM from its own capital. The new hues seem to be unfamiliar to you so it’s better to understand everything from the background.

We as your most trusted brokerage firm want to make it very clear that all margin requirements will proceed to remain the same until September 1, 2020, there may be few changes after this. There won’t be any severe change for you (the customer), but for us (the brokers) there are going to be some crucial back-end modifications. Another modification is in debiting shares from your Demat on the same day you sell them and making an Early Pay-In (EPI) to the exchange before 7.30 PM rather than how we presently transfer them to the exchange on the next trading day. This phenomenon of EPI is being instructed to assure that you are not reimbursing any extra margins to sell your stock holdings and also to enable you to buy other stocks from proceeds of selling your existing stock holdings in the new margin authority for trading stocks.

You can purchase new stocks with the Sale proceeds from holdings

As you used to sell stock to buy other stocks, the same way you can continue till Sep 1st 2020. We can authorize you to sell your stock holdings without any margin by debiting your Demat account and doing EPI to exchanges by 7:30 PM on the same day. Also, the stock being EPI can be considered as margin, allowing you to buy more stock from the sale proceeds. There have been certain issues of time to move securities from Demat account to exchange as the deadline for doing the same is 7:30 PM. The brokerage firms are trying to get an extension of this timeline as it takes more than 3 hours to process the trade. Exchange shares the trade files by 4.30 pm, which has to be first processed, the instruction file needs to be created to debit all client Demat accounts, the depository has to then process these instructions. To sort the inconvenience, we might start debiting stock from your Demat account as soon as your delivery sell order gets executed on the exchange during market hours.

As the relaxation in the collection of margin is being provided, one category of trade will not be probable is selling stock from your Demat and then buying it back before the end of the trading day without any margin in your account. This will most likely be applicable from Dec 1, 2020, when the penalty on peak margin reporting starts — which instructs the customer to have adequate margins at every point during the trading day and not just on an end of day basis. We can understand this by taking an example.

Presume you have 100 shares of Reliance in your Demat and no other money in your trading account. You can make the selling of these shares possible and using the proceeds to buy back some other stock. We will debit your 100 shares of Reliance and give it to the exchange before 7.30 PM on the same day, on our part. Thus, no margins are mandated for selling, and this value of Reliance shares sold can be used to buy shares of some other company. But assume if you sell 100 shares of Reliance at 10.00 AM and then decide to buy back the same stock at 11 AM, no stock for EPI would be there as it will become an intraday trade by the end of the day. While there is no position at the end of the day for margin reporting, at 10 AM you would have 100 shares of Reliance short which would require a margin of around Rs 40,000 (20% of 100 x 2000) in the peak margin reporting regime. Heretofore this Rs 40,0000 isn’t available as margin, this would affect an upfront margin penalty from Dec 1st 2020. We will not be able to allow the customers to take such positions even if we are willing to do so. The penalty for this shortfall will get charged on us (brokers).

Can sold holdings be used to trade F&O? 

If the exchanges will empower a clarification that the EPI can be deemed as margin for new stock and F&O trades, then you will be able to sell your stock holdings and use the proceeds to enter F&O trades immediately.

Can new F&O positions be taken after retreating existing F&O positions?

The blocked margin will get released if you leave the hold futures or short options positions. This margin can be then used to trade futures, short + long options, and even stocks. Besides, you can also sell your existing long options position and utilize the credit to enter new long options positions without having to pay any margin penalty. Until the next day of trading, buying stocks, or writing options, can’t be done from credit earned by selling overnight long options positions but only to enter new options positions.

Can intraday profits be used to enter new trades? 

The profit will not be entitled to be used for new positions until resolved by exchanges. All realised intraday profits for stock trades get paid up on T+2 day. All realised intraday F&O profits and realised Marked to Market (M2M) profit in futures gets finalized on T+1 day.

Obtaining proceeds from BTST trades to trade F&O

60% of the value of the stock in BTST trades sold will be available as margin to take new positions in F&O or for buying other stocks. The purpose for this is that in BTST there will be no stock to deliver to the exchanges via EPI on the day stock is sold since the stock isn’t credited to your Demat yet (Stocks bought get credited on T+2 day). For example, if you purchased stocks worth Rs 100 today when you sell it tomorrow, Rs 20 has to be shown as blocked for margin to buy (VAR+ELM or 20%), Rs 20 has to be shown as margin blocked for selling on T+1 or BTST day (VAR+ELM or 20% as stock not available for EPI), and you’re left with Rs 60 that can be used to take new positions. We are waiting for clarifications if there is a way to allow you to use 100% of the proceeds from stocks sold even when it is BTST.

The new norm from SEBI says: 

In the opinion of the articulations received from investors, TMs / CMs, stockbroker associations, it has been decided that:  If TM / CM collects minimum 20% upfront margin in lieu of VaR and ELM from the client, then the penalty for short-collection / non-collection of margin shall not be applicable. However, it is restated that Clearing Corporation shall continue to collect the upfront margin from the TM / CM based on VaR and ELM. Secondly, the penalty provision for short-collection / non-collection of upfront margin in the cash segment shall be implemented with effect from September 01, 2020.

Let us take you to the background that compensation of stocks in India takes 2 days, which means that if you buy a stock, you’ll get it in your Demat account after T+2 days. Similarly, when you sell a stock, the credit from selling the shares reaches your account on T+2 days (This is T+1 for all F&O positions). There was no margin collection and reporting for cash market transactions. But from 1st August, we require SPAN+Exposure for taking F&O positions, all clients will need to have VaR+ELM for cash/stock transactions. Brokers can accumulate a minimum 20% but the clearing corporation shall continue to collect VAR + ELM or 20% = balance is the part of the trading member. With this feeblest upfront prerequisite of VaR+ELM, intraday leverage offered by brokerage firms will only be to the extent of this margin.

About F&O

Ideally, since the stock which is traded is going to be delivered to the exchange (Early Payin) on T-day and there is no risk. The client should be able to immediately use the proceeds from the stock sold to buy some other stock or use it for F&O if required (hedging or trading), but you will not be able to.If you say how does this impact full-time F&O traders? Then we can assure that nothing changes for F&O intraday, apart from the fact that there won’t be any intraday leverage over and above SPAN+Exposure margin in F&O.

 This will be applicable from:

This SEBI circular says that there will be a penalty if trades are allowed without sufficient VAR+ELM or 20% for stocks, and SPAN+Exposure from Dec 1st 2020 even on an intraday basis.

1st phase from Dec 2020 to Feb 2021 – penalty, if margin blocked, is less than 25% of VAR+ELM ( or 20% of trade value) for stocks or SPAN+Exposure for F&O. (Max leverage of 5% or 20 times for stocks)

2nd phase from Mar 2021 to May 2021 – penalty if margin blocked less than 50% of the minimum margin required. (Max leverage of 10% or 10 times for stocks)

3rd phase from June 2020 to Aug 2021 – penalty if margin blocked less than 7the 5% of minimum margin required. (Max leverage of 15% or around 7 times for stocks)

Final phase from Sept 2021 – penalty if margin blocked less than 100% of the minimum margin required. (Max leverage of 20% or 5 times).

The above nearly implies that in a phased manner the broking patronage will develop a hierarchy where intraday leverages delivered can’t exceed what is already demanded by VAR+ELM (or 20%) for stocks and SPAN+Exposure for F&O by Sep 2021.


Astha Credit & Securities (P) Ltd alias AsthaTrade is an Indian stock broking company established in 2003. The company is a member of the National Stock Exchange of India (NSE) and Multi Commodity Exchange of India Limited (MCX).It is a depository participant with National Securities Depository Limited (NSDL).
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