REGULATORY CHANGE- ALL ABOUT BOD MARGIN RULES

Introduction

In the world of financial markets, regulations and guidelines often undergo updates to ensure fair and secure trading practices. On May 2,2023,significant changes were implemented regarding Peak and End-of-Day (EOD) margin penalties.

In view of the representations received from market participants and based on deliberations with various stakeholders, exchange has now been decided that EOD margin collection requirement from clients, in derivatives segments (including commodity derivatives), shall also be calculated based on the fixed BOD (Beginning of Day) margin parameters.

These changes have implications for traders and investors alike. In this blog post, we will delve into the key modifications and their potential impact on the trading landscape.

What is the Margin shortfall?

As per SEBI regulations, the Margin shortfall is applied to positions with insufficient margins. The rules require latest SPAN & Exposure or stock physical delivery margins to be available in client’s derivatives allocation.  

Margin shortfall can happen due to reasons such as removal of hedge position, increase in margin requirement by exchanges, mark to market losses. Under such a situation, penalty is applied as a percentage of the Shortfall Amount which is prescribed by the regulations which is deducted by the broker and submitted to exchanges.

Kinds of margin shortfall

There are two kinds-

• EOD Shortfall – In case the clients positions at the end of day have a shortfall as against the required margins, then a penalty is applied.
• Peak margin shortfall – The exchange takes 4 snapshots of client positions at random times during market hours everyday and in case there is a shortfall during any then penalty is applicable.

Increase in margin requirement taking position?

Margin requirements can increase either due to:

1. Increase of SPAN margin by the Exchanges during the day or 

2. Squaring off one leg from spread/ hedge position (causing the unhedged positions margin to increase). 

3. Mark to market losses leading to shortfall of margins 

How is it monitored in Intraday?

During the day, exchange takes of 4 snapshots of the client’s positions to know the intraday margin requirements. The snapshot which has the highest margin is considered to be client’s peak intraday margin requirement.

Any shortfall in this requirement during Intraday leads to the levying of the Peak margin shortfall penalty as per the exchange framework. 

What happens overnight?

After the market closes, clients need to maintain EOD or End of the Day margin (SPAN + Exposure) for open positions. This is then tallied with the latest exchange margin requirement which gets updated even after the market closes. Any shortfall here can also lead to clients being charged EOD margin shortfall penalty. We are communicating with customers about EOD margin shortfall.

What is BOD margin?

BOD margin marks the amount of funds at the beginning of day to initiate a position.

How can I avoid margin shortfall?

To avoid the margin shortfall, you can ensure that sufficient limits are available in your account in case of any increased requirement for margin by the exchange. ICICIdirect allows margins to be brought in by Cash or Shares as Margin for F&O Contracts. Square off hedged position simultaneously. Check Shortfall or Excess Margin after placing order or squared off every time.

Shortfall / Excess Margin tab in F&O section also shows the shortfall or excess margin on a real time basis which can help you make informed decision.  If the client sees a Margin shortfall, then he needs to add margin in any F&O open position. After every SPAN file update by the exchange, ICICIdirect will attempt to block additional margin from your FNO free limits if the SPAN margin increases or will release limits if SPAN Margin decreases. This also helps to avoid the penalty.

Timeline of changes:

SEBI imposed the peak margin penalty in 2020, and phases of this fine’s implementation were completed by September 2021

• To ensure that no more intraday leverage could be offered in F&O
• Leverage would be capped at 5x while dealing equities

Four random snapshots of a trader’s open positions would be taken by the exchange during the trading day

• Peak margin penalty would be imposed if the required margin is more than the available margin

The SPAN margin from the exchange updates four times during market hours in the event of F&O, nevertheless

• Based on variations in volatility during the trading day, the margin rises or falls
• As a result every time the SPAN is updated, the margins increase as volatility rises

As expected, this would result in a scenario where every daytime increase in SPAN would result in a peak margin penalty

• even if the customer had enough margin available while taking a F&O position

The problem was resolved by SEBI in May 2022, which stated,

• that even if SPAN grew throughout the day due to higher volatility, a margin penalty would not be applied if the broker made sure that at least the beginning of the day (BOD) margin was available when establishing a position.

While there is a peak margin penalty for letting a client begin a trade without enough margin, there is also an end-of-the-day (EOD) margin penalty if a broker doesn't make sure there is enough minimum margin at the end of the day

• This meant that even though the customer had enough margin upon taking the position, if SPAN grew during the day and the account did not have enough margin to cover the difference, there would be an EOD penalty instead of a peak margin penalty.

Take into account, for instance,

• if you hold a Nifty futures position that requires Rs 1 lakh in SPAN margin.
  • Let's say the volatility grew, the margin rose to Rs. 1.1 lakhs by the end of the day, and the account was short the extra Rs. 10,000.
  • There would be an EOD penalty on the Rs. 10,000 shortfall, but there would be no upfront margin penalty.

To resolve this problem, SEBI released a new circular in February 2023 that, as of May 2, 2023, permits the calculation of peak and EOD fines using the BOD margin data.

• Therefore, there won't be any penalties assessed on the trading day if there was sufficient margin when taking a position and margin increases for whatever reason during the trading day.
• Naturally, there would be a penalty if the margin increase requirement wasn't fulfilled the next trading day.

Conclusion

The changes to peak and EOD margin penalties introduced on May 2, 2023, signify a significant step towards refining risk management practices in financial markets. The revised margin rates, penalty structures, and extended reporting windows seek to foster stability and mitigate potential risks associated with excessive leverage. Traders and investors must familiarize themselves with these changes and adapt their strategies accordingly. By doing so, they can navigate the evolving trading landscape and ensure compliance with the updated guidelines while optimizing their trading performance.

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