Trading

All About Margin Shortfall and Penalties

 

Margins play a very crucial role in derivatives (Futures and Options) trading.To understand margin shortfalls, it is very important to understand the role of margin trading in the derivatives market.

To trade in futures in the F&O segments,  brokerages provide the leverage as per their policies. In fact, these derivative positions are quite risky due to their volatile nature and a small upfront amount required to trade, therefore, any adverse movement in price can lead to enormous losses to the trader, broker and counter party as well.To ensure smooth settlements, a certain upfront amount is payable to hold the futures position this is known as margin and further shortfall in the upfront amount due to adverse price variation is commonly known as margin shortfall.

As per exchange stipulated norms upfront margin (Initial margin) consists of SPAN margin and Exposure margin which can be calculated using our margin calculator. The margin requirement for all the segment futures script are calculated here which lets you know the margin required to hold overnight position and by mocking your position in our SPAN calculator.It allows you to get margin required for shorting options or other FNO strategies where you get margin benefit.The SPAN system uses strike prices, risk-free interest rates, changes in prices of the underlying securities, changes in volatility and time-value to calculate the worst possible move in the security. For the exchanges, SPAN margin covers almost the entire risk for the day, minimising the systemic risk due to margin pressures.

Let’s interpret how margin shortfall and Market to Market works for your futures position. Let’s assume you own Reliance futures position with a buy price of 1284, the margin required is approximately ₹114,000 which a predetermined percentage of the contract value i.e.  500*1284=₹6,42,000. Here lot size is 500. And hence, any variation in price is reflected through daily MTM. Marking to market, or mark to market (MTM) is a mere accounting practice which involves adjusting the profit or loss you have made for the day. MTM is calculated by marking each transaction in contract to the closing price of the security at the end of trading day. In case the security has not been traded on a particular day, the latest available closing price at the exchange is considered as the closing price

Day

Reliance Margin Req. Reference Price Margin Shortfall

Penalty Imposed

T+1

1,14,000 1280 2000 ₹ 10 (0.5%)

T+2

1,14,000 1268 8000

₹ 80 (0.5%)

T+3

1,14,000 1254 15000 ₹ 150 (1.0%)

T+4

1,14,000 1245 19500

₹ 195 (1.0%)

T+5

1,14,000 1268 8000

₹ 40 (0.5%)

As long as you hold the futures contract, MTM is applicable. Hence it is a long position, therefore if the price goes below the buy price means bearing a loss in the position where it is shown as margin shortfall of ₹ 15,000 on T+3 day and hence margin shortfall penalty is imposed of ₹ 150.The mark to market margin (MTM) is collected from the member before the start of the trading of the next day and same been adjusted in their ledger account. To avoid margin shortfall, need to add funds therefore, Margin call appears with margin shortfall ignoring will be penalized as per the exchange stipulated policies.

 

Margin Shortfall Penalties –

Margin shortfall penalty will be levied by the exchanges when there is a margin shortfall on overnight positions held without sufficient margin as prescribed by the exchanges. Margin shortfall penalties are applicable only for overnight margin shortfall though, it does not apply for intraday positions. Margin shortfall is applicable to equity, commodity and currency futures of all segments including NSE, BSE and MCX.

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 amount.

Margin shortfall collection for each client

Penalty percentage

(< Rs 1 lakh) And (< 10% of applicable margin)

0.50%

(= Rs 1 lakh) Or (= 10% of applicable margin)

1.00%

  • If short/non-collection of margins for a client continues for more than 3 consecutive days, then penalty of 5% of the shortfall amount shall be levied for each day of continued shortfall beyond the 3rd day of shortfall.
  • If short/non-collection of margins for a client takes place for more than 5 days in a month, then penalty of 5% of the shortfall amount shall be levied for each day, during the month, beyond the 5th day of shortfall.

Let’s understand this with an example, for an overnight future position of stock ABC Bank with the specified margin requirement of ₹ 50,000 on T day.  Due to adverse movement in price, the trading account is debited with the MTM loss of Rs.6000 on the same day. In this scenario, though the margin shortfall amount is less than 1 lac, the deficit is greater than 10% of the specified margin requirement. Hereafter, a 1% penalty will be levied on the shortfall amount i.e. ₹ 60 on T+1 day. On each day till T+3 day, the margin shortfall penalty will be leviedwrt the shortfall. If the margin shortfall continuous,then fromT+4 daythe debt amount would be 5% of the respective shortfall amount.

As per exchange regulations, the margin statement is sent with the intention of informing a client about his margin status is i.e. what free margins are available in his account in order to take new positions without incurring penalty or charges. Here, all obligations will be adjusted against the funds i.e. if there is a credit (profits) it will be added & if there is a debit (loss, charges) it will be deducted from the available funds.

 

Lack of awareness about Margin Shortfall

We found that there is a lack of awareness about margin shortfall, especially among the new traders. As this information is not sought after until one experiences a margin shortfall situations and penalties are levied, the topic does not get the deserved attention. However, if you feel that others can benefit from the information in this post, do feel free to share it with other fellow traders. I hope the examples used were helpful to understand. If you need any clarifications you can reach out to me in the comments section below.

Happy Trading!

Tejas Khoday

Tejas Khoday

Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.

29 Comments

  • Avatar Riyas m says:

    Sir , please provide P&L statements fyers like how zerodha provides

    • Tejas Khoday Tejas Khoday says:

      Hey, we are upgrading our back-office and it will be launched this month. Post collecting feedback for a month or so, we’ll implement it as per our clients’ requirements.

  • Avatar Jay says:

    Thanks Tejas,
    I want to know if some one want to short option and required 10 lakh of margins he manages it by 5 lakh of cash and 5 lakh by colletrall ,how much charges of colletral levied and any interest applicable in fyers?

    • Tejas Khoday Tejas Khoday says:

      Collateral/Pledge charges per scrip are Rs-200+18% GST and as of now, we are not charging any interest.

  • Avatar Nishith says:

    Hi,

    Is this applicable to option buyers (both Call and Put) ?

  • Avatar rohan says:

    sir plz update fyers one

  • Avatar Sai Arvind G says:

    Is GST is applicable to the margin shortfall penalties?

  • Avatar Ajit singh baru says:

    Hi Tejas, Remarkably expressed the topic as you always do.
    Can I settle margin shortfall amount with collateral stocks instead of the cash? As I can pledge the shares to the broker and obtain a fund in exchange and end of the day I need to settle the shortfall amount with a broker only.

    • Tejas Khoday Tejas Khoday says:

      Hi Ajit, Thanks. To pledge the share it takes 24 hours .. shortfall on a particular day has to be cleared on the same day. The benefit of the pledge can be used from the next day onwards.

  • Avatar Arnab Roy Chaudhary says:

    Indeed! Margin plays an important role in futures. After having such a stringent arrangement, why do the exchanges calling for the physical settlement? Your view on this?

    • Tejas Khoday Tejas Khoday says:

      The Indian markets are not ready for physical settlements yet. The imposition of compulsory physical settlements was a move to curb derivative speculation but I don’t think it resolves anything IMO.

  • Avatar Ankita sharma says:

    Sir Does the penalty percentage which is imposed on margin shortfall varies on time to time or it will be constant?

  • Avatar Sangeeta Jadhav says:

    This article is indeed useful and needs to be circulated among traders. A small suggestion, please keep us notified as and when an article is posted here maybe through some email or app notifications. Thanks.

  • Avatar Preetham Erukala says:

    Hi, what extent can a client hold his position in losses to? What are the policies of Fyers? And how are shortfall charges collected by the brokers?

  • Avatar V V Krishna says:

    Good article. I have gone through your margin calculator but I was not able to operate it. Can you share any article or a video for the same?

    • Tejas Khoday Tejas Khoday says:

      Margin calculator is really simple to use. You can get in touch with our support team for assistance as we don’t have a video explaining it. Guess it’s time to make one soon.

  • Avatar Shivambhu Upadhyay says:

    Hey Tejas, is it applicable for the Options Shorting as well? I am little new to all this and know that even options shorting requires the overnight margin. Please explain.

  • Avatar Rupansh Ahuja says:

    A very informative article. One query as to what extent can a client be kept with the non-compliance of the margin requirement in the position? Meaning is there a limit he can hold his position without meeting the margin requirements?

    • Tejas Khoday Tejas Khoday says:

      The limits depend on the scrip as mentioned in the blog. However, note that you will be charged penalties even if there is a shortfall for 1 day.

  • Avatar Ranganath R A says:

    Hey Tejas, why do the positions fall into margin shortfall if the brokers have an RMS (risk management system) with them? The RMS should inform the client regarding his shortfall and intimate him about the penalties. What do you think?

    • Tejas Khoday Tejas Khoday says:

      Hi Ranganath, It’s due to the settlement mechanism (Mark-to-market). This concept does not apply to options buyers and equity traders or even intraday traders.

  • Avatar Saurabh Mehta says:

    Sir, it is a very informative blog, I was not aware of the penalties which are imposed when we fail to maintain sufficient margin. You explained it so well with an example. Thank you Fyers for such crucial information about margin shortfall.

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