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New regulations to reduce Intraday leverage

After the multiple wrongdoings and fraudulent incidents unfolded at various brokerages, capital market regulator -SEBI came up with many additional rules and mechanisms to curb the possibilities of financial fraud and incidents related to alleged misuse of funds and securities. Since a year,  the full outgrowth of these frauds unfolded, there was ambiguity among the market participant especially, retail traders about the revision of exchange margin policies. Now, NSE and BSE have struck down the ambiguity through the latest circular on margin collection and reporting in the context of SEBI circular dated November 19th, 2019.     

This move by SEBI to disallow stockbrokers from providing additional leverage for intraday trades is an arrow that aims at 2 points at the same time. The first is to safeguard the large chunk of retail investors in the stock market ecosystem who are unable to handle leverage effectively and secondly, to curb the misuse of clients funds. Currently, we are closely monitoring the development in margin collection and reporting mechanism and in touch with the exchanges for further implementation.


What has changed?

As per the exchange clarification on the margin collection, clients have to pay the entire upfront margin i.e. VaR margins + Extreme Loss Margin (ELM) for Equity and SPAN+Exposure in case of FNO to trade through any product code or order type. For currency derivatives, it is mandatory for clients to pay initial margin, net buy premium and extreme loss margins on an upfront basis. 

For instance, if a TCS stock you would require to pay VaR + ELM (12.5% or 8x) to take trade using any order type. Therefore, maximum intraday leverage can be provided by the brokerages will be VaR+ELM (12.5% or 8x) irrespective of the order type. Prior to this many brokerages use to lure the customer with huge leverage while putting them on a huge risk. Going forward, Intraday product types like – Intraday, BO and CO will have uniform leverage as per the margin policy i.e. Var + ELM for Equity. Furthermore, for 1 lot of NIFTY futures, you need to pay the entire Span+Exposure margin (11.5%) around ₹ 1.04 lacs to trade using intraday orders like Intraday/BO/CO which earlier you traded with just ₹ 35k, therefore intraday leverage given by the brokerages to trade is going to become null and void.

According to circular, even selling of shares would require clients to deposit prior margin with the brokers and which was not the case so far but, if a client has a Demat and Trading Account with the same broker, margin for selling of the shares will not be required.  

If brokerage fails to collect or client fails to pay requisite margin on an upfront basis or MTM losses by T+1 (for derivative) and T+2 (for equity and commodity segment) termed as a short reporting of margin collection and shall attract applicable penalty as mandated by Clearing Corporations. Due to a change in the margin reporting mechanism, no brokers will be able to offer any intraday leverage above the prescribed limit as practised earlier. 

We think traders who were happy with additional intraday leverage to earn quick money,  are the one who is going to be affected the most and they have to increase their trading capital in order to trade with new margin policies. We all understand that this policy has come up with its own pros and cons,  while this new policy on margin will probably have a negative impact on our business and the entire brokerage industry as the volume may dry up to some extent and our revenues may be hit. Also, this will most likely lead to an increase in the impact cost/slippages. The increase in the margin requirement for the Intraday option selling/expiry trading may end the craze of weekly options and traders may be forced to move to monthly options in stocks and indices. 

New margin requirements can hamper the interest of traders trading with big money like proprietary traders or HNIs as well. For instance, A trader with an intraday trading capital of 1 crore can only able to short approx 100 lots of Bank Nifty. If we assume that he receives the option premium of around ₹10/lot on expiry day, i.e he will receive ₹20k (10*20*100)  as a total premium which is just 0.2% return. This will hit the profitability of options sellers to a great extent.    

Although, we hope in the long term it will benefit the stock market ecosystem. It may also help retail traders to adopt a disciplined approach and might indirectly control the speculative activities in the market. We have seen that over-leveraged position can easily blow up the clients trading capital. Adequately leveraged system and positions will positively make trading clean and one relying on the highly leveraged brokerages may need to go back to the trading basics. We hope this regulation will help prevent such scenarios and increase market participation in a more sustained manner.  

With regard to the implementation of the margin collection and reporting policy, we are in touch with the concerned officials and industry veterans to get more clarity on this. At this moment, the brokerages are incertitude and we are waiting for exchange clarification on this matter. Until then, margins will be provided as per the existing margin policy, check out our Margin Calculator for more information. We are tracing the developments in this regard and we will keep you posted.   

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.

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  • Avatar sooraj says:

    Sir what is latest news on margin reduction..?? When is SEBI going to reduce intraday margin..? or it has postponed this just like it has postponed Market timing extension till 11.55 pm..?

  • Avatar Johnson Stark says:

    Forex ban, crypto ban and high tax in everything now this happening. India government don’t want us rich. They want us slave in their feets as an employees.

  • Avatar Rahul Singh says:

    I read the circular carefully… I did not find FNO mention anywhere in it…. For first 3 parts its about earlier circulars …. 4th part start with cash and fno background but 4.1 4.2 4.3 deals with cash and only give examples of fno how clearing and collection is done in fno same will be in cash….. I may be wrong and brokers might be briefed clearly and elaborately about it but as far as my understanding of papers as an official. I feel either its nothing clear about FNO or atleast leave enough loopholes for players to use it as per their wishes…… Such orders are passed to show impresson of strict rules and pave way for expolitation of brokers and clients by the officials…… Its as simple as that ……. I am sure except cash segment other will not affect much…. SEBI will do some adjustments in coming days ……..

  • Avatar Subhash Chandra Ghosh. says:

    I do not understand, when SEBI says, it is for the “Cash segment.” Then how it will affect F&O segment. Therefore, it will affect the Equity market, not the F&O market. I am not a master in any way, simply, what I felt I wrote. Anyway, masters are busy doing their homework and we will know very soon. I hope everything will be fine and our hope too.

  • Avatar Dhiraj says:

    but CO showing the same margin as previous

  • Avatar Rohan says:

    I am an intraday trader who uses leverage… I am involved in stock markets for more than 4 years now.. I usually do option selling… And i get good ROI on my investments with leverage…I know how to use leverage properly and safely…
    Please dont kill the leverage option in the name of protecting capital of new comers.. We are adults, we know how to manage risk..
    As per SEBI’s thinking-
    1. no any banks shall be allowed to give any loans to anyone as there are a ton on NPAs seen recently….
    2. Experienced drivers should sit at home and not drive just because some new person got a driving license today and he committed an accident..

    SEBI shall come with rules and regulations to prevent Karvy like incident, rather than being childish and banning leverage altogether.

    Leverage is part of life and any business..
    1. For buying a car we take a loan, that is a leverage
    2. For building a house we take a loan, that is a leverage
    3. For starting new business we take a loan, that is a leverage
    4. For business expansion we take a loan, that is a leverage
    5. Using credit cards is a form of taking leverage
    6. and many many more..

  • Avatar Naman says:

    SEBI is killing the Indian Stock Market. Retail participation in India is already very low as compared to other developed countries. This move will further dampen the spirit of new traders.

  • Avatar Amit says:

    Very bad move…this will be the end of market and surely discount broker… who can put 10/20 lac in broker account for trading…

    • Tejas Khoday Tejas Khoday says:

      Hi Amit, everyone will be affected by this move to some extent. The government included! So it’s not just us. It’s about how everyone evolves.

  • Avatar Mahendra Pal Gour says:

    Not a good decision by SEBI. Big institutions doesn’t affect from this decision but retailers will be thrown out.

  • Avatar Rahul says:

    Volume was getting better since few years now but it will get dried up after this movement. Instead, SEBI should have limit the maximum amount in trade per trader which would reduce speculative activities.

  • Avatar Rakesh says:

    This will paralyse complete volume of the market and the retail trader like us will definitely leave trading. And worse part of this circular is people who got into the market because of you and other discount brokers will now leave it. And in future definitely these discount brokers has to increase their brokerages to run their firms.

  • Avatar Vijay says:

    Please sign this petition

  • Avatar Hiren says:

    SEBI will throw all the retailers out from the F&O market. It wants the retailers to only absorb the cash selling/buying from the FIIs. Sebi is behaving more like an agent of FIIs and other big players.
    If the idea is to inculcate discipline among retailers, then they should think about levelling the playing field. Govt needs to bring in a representative from retailers and brokers on SEBI board.

  • Avatar Swapnil says:

    What next maybe SEBI will ban indicators like MACD, Supertrends as they help small traders to make money . because the ultimate goal of SEBI is only institutional investors should make money not a small retailers

  • Avatar SOURENDRA KUMAR DEY says:

    For Sebi rules intraday trades are finished for retail intraday traders ?

  • Avatar Karthik says:

    Thank you for updating us, Hope for the best

  • What will happen to brokers who earn only from brokerage ? How can they survive if volume is not much.

  • Avatar Abhilash singh says:

    Help Buddy, If this happens only retailers like us affect the most. We were kicked out of the market and only big traders remains & control the market……Kuch kro 🙁

  • Avatar Maaya Vritra says:

    Due to this change in the margin , no brokers will be able to offer us any intraday leverage above the prescribed limit which will seriously affect us as a trader.

  • Avatar Rajan says:

    This new policy of SEBI is mind boggling. We small traders cannot trade anymore. Mr. Tejas please do something about the situation because both the brokers like you and the traders like me are affected. The repercussions of such policies will only make the market illiquid and people will stop trading.

  • Avatar Samir Jha says:

    This is the biggest scam ever !! Big players are debarding the retail traders &investors from participating directly in the capital market . They are forcing retail investors to follow the mutual funds route to capital markets by imposing margin to even sell their equity. (I don’t know even a single country where the sellers have to submit margin in advance for selling shares lying in there Dmat account. Why in India?? …The 21st century technology is much more than just efficiently to manage the risk involved.)

  • Avatar K.L.N Vara Prasad says:

    Why retailers should be punished for a few stockbroker’s mistakes.?
    Thanks for the update on SEBI’s circular.
    Now as a trader we should be focusing on options calls and puts.

  • Avatar Mamta Kohli says:

    Brokers mostly earn through the volume of trades which comes with a great retail participation but this new regulations will affect their revenues so how are you going to tackle this?

  • Avatar Balajirao says:

    Not able to understand why SEBI want stop retail traders, out of 130 cr only having apx 4 cr demate accounts, how many active out of them don’t know .Due to this more retail traders out of the trading.

  • Avatar Sujay says:

    What is the fate of brokers in the future?? We traders will trade in BNF tomorrow but what about you guys..

    • Avatar Bikash says:

      As per my understanding, It won’t affect discount brokers like Fyers a much. It mostly have big impact on the traditional brokers, who allow clients to take position without upfront margin and offer a high Leaverage.
      Can rectify me, if I am wrong.

  • Avatar Sushh says:

    SEBI is reacting late to ILFS scam and is doing all kinds of things in panic. What wrong did retail traders do that they are tryin gto keep them away from the market?

  • Avatar Dheeraj says:

    Please oppose this move.. It is making everyone totally miserable since news came out. As a broker you will be affected the most.. Why don’t you form a group with your friend Nithin Kamath and go fight with Sebi not to ruin liquidity in Indian market?

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