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How does Margin shortfall penalty work and what can you do to avoid it

12 Apr 2022 0 COMMENT

What is the penalty?

As per SEBI regulations, the Margin shortfall penalty 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 penalty

There are two kinds of penalty –

  • 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, 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.

What is the penalty structure?

The following penalty shall be levied in case of short reporting by trading/clearing member per instance for EOD or Peak margin.

If short/non-collection of

Penalty percentage

Margins is less than 1 lakh or less than 10% of the applicable margin

0.5%.

Margins is greater than 1 lakh or greater than 10% of applicable margin

1%

Margins for a client continues for more than 3 consecutive days

5%

Margins for a client takes place for more than 5 days in month.

5% each day

Who charges the penalty?

The penalty is charged by the Exchanges and is levied as a percentage of the shortfall amount.

Do I have to pay GST on the penalty?

Yes, GST is applicable on the penalty and is added to the penalty amount. The overall amount post addition of GST is deducted from the account. The current rate stands at 18%.

EOD margin shortfall communication with ICICIdirect clients

Client can see view under the Open Positions or Limits section in F&O on the Shortfall and make appropriate decisions

An EOD margin statement is also sent to customers of F&O on a daily basis by ICICI Direct. Sample report is given below:

We also inform customers through SMS for both Peak and EOD shortfall.

When is EOD or Peak margin penalty collected by ICICIdirect from clients?

Once the exchange provides the details about EOD & Peak margin shortfall penalty on T+6th day, then clients will be updated on the amount that has been charged from their account.

Where can I view the penalty amounts charged to me?

You can view the penalty charged under the Debit/Credit Note in the Settings section of the ICICIdirect website. Furthermore, this information is also updated in your bank account. Customers cannot view the penalty contract wise since the margins are calculated on overall positions basis. 

How can I avoid the penalty?

To avoid the penalty, 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. Squared off hedged position simultaneously. Check Shortfall or Excess Margin after placing order or squared off every time.

The calculator 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 needs to add margin in any open position. After every SPAN file is updated 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.

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