SEBI peak margin rules explained

You may have come across terms like intraday trading or margin trading when participating in stock market transactions. Since March 1, 2021, the Securities and Exchange Board of India (SEBI) introduced some new peak margin rules.

What are peak margins and their significance in the stock market?

According to SEBI regulations, brokers must collect a minimum amount before their clients enter a trade. This is referred to as margins. The more volatile the stock, the higher the margin requirements. This ensures that buyers and sellers honor the trade, even if the prices fall or rise later.

Originally, margin requirements were only needed at the end of each trading session. As a result, brokers used to provide higher leverage to their clients. As leverage increases, speculations increase as well.

To minimise such speculations, SEBI proposed to amend these peak margin rules.

In SEBI’s new peak margin rules, the clearing corporation will calculate the margin requirements four times over different time windows. The peak margin will be the highest of these. The investor will need to maintain the same in their broker account. Failing to do so would not only affect the trader’s future trades but will also result in a penalty to the broker.

What are the new peak margin rules introduced by SEBI?

Trading margins were previously set at 25% with the broker. Monitoring was done after the trading session. However, now the exchanges are required to collect the margins before their clients enter intraday trade. Following are some features of SEBI peak margin rules:

  • In March 2021, the upfront margin requirement went up to 50% from 25%
  • SEBI plans to raise this limit to 75% by August end and 100% by September
  • Brokers will be able to offer a maximum leverage of 20% to their clients
  • Brokers have to maintain a record of margin collection, failing which they will face penalties

Here are some observations on how these rules will affect the market and investors.

  1. Impact on the market

Since the next two phases are yet to be implemented, it is too early to evaluate the overall market impact. There are some things that we should expect, however:

  • With people getting a hang of new rules, initial trade volumes could decline, which, in turn, may increase market volatility.
  • There would be a lower leverage risk. With the capping at 20% and brokers attracting penalties, it would ensure more secure trading.
  • There would be more transparency in trades, ensuring a stronger and fraudulent free market.
  1. Impact on traders
  • With upfront margin payments, investors would only invest what is within their budgets, in turn, reducing the trading volume.
  • Initially, the traders didn’t have to maintain the margin for squared-off positions at the end of the day. However, now they will always have to ensure the margin requirement. To avoid non-compliance, traders might square off their positions as soon as possible.
  • A major impact would also be felt by high-end traders. They would now have to park their funds in liquid accounts, which might result in them losing interest income.

Are these rules harmful or beneficial to investors?

The aim of these rules is to change the way in which traders trade. Rapid trading cannot be done now without putting up margin money. Initially, brokers would settle the margin amount themselves for high-profile clients, but now they must provide proof of collection from investors. So, now the investors will need to make sure they have liquid funds to trade.

How does this new rule impact you?

With the introduction of the new norms, the trading environment would be more transparent with fewer speculations. Brokers would also be more careful when suggesting which stocks to buy today.

You can also consult a financial advisor for additional clarification. They will not only guide you on new changes in the stock market today but also assist you in choosing the right stocks based on your investor profile.