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Upfront Margin In Cash Segment

Post Date : May 21, 2022

According to SEBI circular dated 19th Nov, 2019, all the brokers are now required to collect and report margins in the cash segment. This is currently applicable in the derivatives segment. A flat 20% upfront margin needs to be collected in the cash segment.

Let’s find out the reason why SEBI made this move.

Earlier brokers allowed clients to buy/sell stocks for delivery without asking them for upfront margins or delivery. The client was required to fund the account until T+2 after the execution of the trade or after transferring the sold shares by providing a DIS Slip. The risk in this practice is higher for the broker and for the overall system. This is because the client may not pay up or provide shares sold thereby defaulting. The chances of default are higher in case of adverse market movement.

The new circular by SEBI states that a minimum flat 20% of transaction value needs to be collected upfront. This needs to be done irrespective of the stock’s VAR+ELM. In a special case, there might be a margin shortage or penalty.

In the case of Buy Today Sell Tomorrow (BTST), a margin of 40% is levied. There might be a shortage in case full funds are utilized in the FO/CDS segment while taking new positions.

Here is an example to understand how Indian exchanges follow the T+2 settlement mechanism. Suppose a client buys shares on Monday. Monday here becomes the T-Day. The securities in this case will be credited to your account on Wednesday which is T+2 day, the payout day of securities. Similar will be the case when the client sells the shares from his account. Suppose the shares are sold on Wednesday (T Day) the shares will be debited from the account on Wednesday which is the T+2 Day. The same is the case when funds are debited/credited.

Suppose in the case of the BTST you buy a stock on Monday for a price of Rs. 200. A margin of 20% i.e., 20% of the transaction value (20% of 200 ie., Rs.40) will be levied on your account. The margin will be levied until the pay in of the funds to exchange is done on the T+2 day. The stock will be credited to your account on Wednesday (i.e., T+2 day). Suppose you sell the stock on Tuesday. Now that you don’t have the stock already credited to your account (it will be credited on Wednesday), you don’t have stocks for doing early pay in. In such a case, a sell margin of 20% of the transaction value will be levied by your broker on your account. Thus, 40% of the transaction value will be blocked as a margin.

Once you sell the shares on Tuesday 100% value will be credited to your account. If you use more than Rs. 120/- to take a position in the NFO/CDS segment you will be short of margin and will be penalized for the excess amount used by you.

Apart from the 20% transactional value, the exchange also charges an additional or Adhoc margin and MTM

Let’s understand this with the help of an example considering Eicher Motors and TCS share.

Case 1: 

Suppose you buy Eicher Motors at Rs.3700/- on Monday and it closes at Rs 3698/- then Rs. 742 (20% of 3700=740 + Rs.2/- )will be blocked as MTM difference between the stock’s buy price and closing price. On Tuesday, you sell the share at Rs.3700 while the stock closes at 3705/- then a total margin of Rs.1487/- (742 of Monday and Rs.745 for Tuesday trade 20% transaction value and MTM i.e., Rs.5). In this case, the available balance for which you can take FO/CDS positions will be Rs. 2213 (i.e., 3700-1487). If you take any position beyond Rs.2213, you will be applicable for short margin penalties.

Case 2:

Suppose you buy TCS share at Rs.3300/-on Monday and it closes at Rs.3300/-then Rs.690 will be blocked as margin ( 20% of 3300=660 with Rs.30/- as additional or ad-hoc margin). now if you sell TCS stock on Tuesday at Rs.3300/- and it closes at 3301, then Rs. 1381 will be blocked as a margin (690 of Monday and 690 of Tuesday along with Tuesday MTM of Rs.1/-).

The available balance in this case for taking positions in FO/CDS Segment will be Rs.1919 (3300-1381). If you take positions beyond Rs.1919/- you will be applicable for short margin penalties.