Margins in trading refer to the amount of money or collateral that brokers require clients to maintain before executing orders to cover potential losses. A margin shortfall occurs when clients fail to maintain adequate margins as required by regulatory bodies like SEBI. This shortfall represents the disparity between the margin prescribed by the regulatory authority and the actual available margin in terms of funds or collateral. Various factors influence the margin amount needed for a trade, including liquidity, volatility, time to expiry for futures and options contracts, and the overall positions in the portfolio. It is crucial for traders to monitor their margin requirements continuously, as these can change even after the order execution. Failure to maintain sufficient margins can lead to penalties and other consequences, making it essential for traders to stay informed and manage their margins effectively to avoid such shortfalls.
What is the Margin Shortfall Penalty
Margin shortfall penalty will be levied by the exchanges when there is a margin shortfall on overnight positions held in the trading account without sufficient margin as prescribed by the exchange. This penalty is applicable only for overnight margin shortfall however it does not apply for intraday positions.
Margin shortfall is applicable to stock, commodity and currency exchanges (NSE, BSE, MCX, and MCX-SX). For more details about the prescribed margin required for Derivative future contracts please visit Daily Margin required for NSE Future contracts.
How the Margin Penalty is calculated?
If the overnight margin is less than 1 lakh and the margin shortfall is less than 10% of applicable margin then, 0.5% of penalty is levied and in case if the margin exceeds 1 lakh or the margin shortfall exceeds 10% of applicable margin then, 1% margin is levied on the margin shortfall.
| SHORT COLLECTION FOR EACH CLIENT | PENALTY PERCENTAGE |
|---|---|
| (< Rs 1 lakh) And (< 10% of applicable margin) | 0.5% |
| (= Rs 1 lakh) Or (= 10% of applicable margin) | 1.0% |
If the margin shortfall continues for more than 3 days then margin penalty of 5% will be levied every day beyond the third day of the shortfall. All the penalty amount collected as prescribed by the SEBI guidelines will be deposited to Investor protection fund by all the exchanges.
Let’s consider Mr. Ramakrishna (Positional trader) holds Rs.95,000/- cash in his trading account and carry forwarded 2 lots of Infosys Futures in which he requires a minimum margin of Rs.95,000/- as prescribed by the exchanges. However, due to volatility in the market his account got debited by Rs.5,000/- for his losses on the same day. As the margin, in this case, is less than 1 lakh and the margin shortfall is less than 10% of the applicable margin the penalty will be 0.5% of the margin shortfall i.e. penalty of Rs.25/- will be levied. The following table illustrates how margin penalty will be levied based on various margin shortfall conditions.
| Day | Infosys Future Margin | Margin Shortfall | Penalty |
|---|---|---|---|
| T+1 | Rs95,000/- | Rs5,000/- | Rs25/- (0.5%) |
| T+2 | Rs95,000/- | Rs4,000/- | Rs20/- (0.5%) |
| T+3 | Rs95,000/- | Rs10,000/- | Rs100/- (1%) |
| T+4 | Rs95,000/- | Rs 8000/- | Rs400/- (5%) |
| T+5 | Rs95,000/- | Rs 6000/- | Rs 300/- (5%) |
In the above table you can notice that on T+3 Day the margin shortfall continues to be at Rs 10,000/- which is more than 10% of required margin hence 1% of penalty on margin shortfall i.e. Rs.100 is imposed on the trading account. Moreover, if the shortfall continues for more than 3 days (T+4 onwards) then 5% penalty will be imposed as illustrated in the above table.
Exemption of Margin Shortfall penalty
If short collection of margin from clients is caused due to movement of 3% or more in the index (close to close value of Nifty/Sensex for all equity derivatives) and in the underlying currency pair (close to close settlement price of currency futures, in case of all currency derivatives) on a given day, (day T), then, the penalty for short collection shall be imposed only if the shortfall continues to T+2 day. Visit Tradejini for more information.
