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I had sufficient margins in my account based on which I took the position, despite which a penalty was levied.

As explained here, margin penalty is levied whenever there’s a shortfall in the available margins in the client’s account. The ‘available margins’ considered for the purpose of margin reporting differs from the actual account balance. The margins considered for the sake of margin reporting is referred to as ‘unencumbered balance’.

To understand what’s unencumbered balance, you need to first understand the settlement cycle followed by the Exchanges in India. As per the settlement cycle, the credit in the Equity segment is realized on T+2 and credit in the Derivative segment on T+1. This means that even if you’ve sold stock and received a credit in your account on T day, the same isn’t realized till T+2.

There can be causes that can reduce your unencumbered balance and ultimately result in a shortfall in your account and subsequent penalty charges. 

Few common reasons are mentioned below:

  • Premium collected from options sold can only be used to buy options in the same exchange segment. For instance, if you sell options in equity derivatives and use the premium to trade in other segments, margin penalty will be levied. 
  • Utilization of intraday profits. Profits earned from intraday equity trading are settled after two working days and the profits earned from derivatives trading are settled on the next working day.  
  • In case of a settlement holiday, any funds to be received from the trades taken before the settlement holiday will need an extra day to be settled in your account. Utilization of funds that aren’t yet settled on the settlement holiday can also cause a shortfall in margins.
  • Mutual Fund (MF) orders via Coin are processed at 11.30 AM every day using account balances from your trading account. In case MF orders are placed from your trading account balance before 11.30AM on any day, and then the same trading account balance is utilised towards trading in stocks, futures and options, causing insufficient margins as per the margin requirements from the Exchange, a margin penalty will be levied to your account.

    Also, another important thing to note while using collateral you need to keep in mind that change in the collateral margin due to the change in the price of the stock or due to a change in the haircut applicable can also affect your total margin available.