The SEBI (Securities Exchange Board of India) has come up with a new margin rule that is going to be implemented in phases from September 2020. This new rule has many factos such as limited leverage, new Peak margin requirements, etc. All these rules will impact Derivatives traders as the upfront margin will increase. Know the affect of the new Margin Rule on retail traders.
What is the New margin Rule?
The SEBI (Securities Exchange Board of India) has announced a new rule for Indian traders where the required margin is going to be increased. This rule was imposed in 2020 and is being implemented in phases. The overall margin required at the end of this tenure is going to be 100%
Let’s understand what is margin?
Margin is the total amount of leverage or borrowed money that you are allowed to trade with. This margin is provided by the broker to its clients to take larger positions. This in return can enhance the profitability as well as increase the losses if the view goes wrong. Margin can be understood by the following example.
If you have Rs 1000 in your trading account and the broker provides you a 10X margin. In this case, you can take exposure or buy shares worth Rs 10,000. This extra 9000 is provided by the broker as margin.
This new margin framework is being implemented in a systematic manner starting from December 2020. The steps in the implementation of the new margin rule are as follows-
- From February 2021, 25% of the Peak margin is required.
- From May 2021 50% of the Peak margin is required.
- From August 2021, 75% of the Peak Margin will be required.
- By September 100% of the Peak margin will be required.
With this, it’s clear that by September 2021, SEBI is trying to remove margin completely by asking 100% of the margin from the traders.
How will it affect Retail Traders?
The new Margin rule comes with many variables that have to be taken into consideration. Earlier the receipts of the sold shares can be used to buy any other securities. This will not be the case with the new margin. Only 80% of the money can be used to create new positions in the market. Under the ‘Peak Margin’ requirements, traders also have to maintain sufficient cash balance to avoid Peak margin penalties. These penalties can be imposed by SEBI if a particular trade requires more than the available margin at any given point of the day.
Apart from this Intraday trades will require more margins as the leverage offered by brokers will reduce. This will affect only the Option sellers and Futures Traders who would use the leverage from the broker. Option buyers would be unaffected by this rule. As they have to only pay the premium and nothing extra in terms of span or exposure margin. This might impact the Volumes in the initial days. This is due to the fact that many small traders rely on leverage from the brokers to execute their trades. This could result in an uptick in the number of option buyers from the option sellers.
Conclusion
The new margin rule is made for the protection of retail traders. After the complete implementation of the new rule, many small traders will either have to bring in more capital or stay satisfied with the lower turnover.
This can directly result in a decrease in the profitability of traders who used to rely heavily on margin. By reducing the overall leverage the risk factor will be minimized for the traders who used to take overleveraged positions. There might be a drop in volume in the initial days. In the longer run, volumes will pick up as people get accustomed to the new margin rule.