What are the different types of margins charged by the exchange?

The exchange requires a minimum margin for each trade, with specific margins varying by trading segment. Here are the different types of margins you need to understand:

Equity margins

Var + ELM (upfront margin)

The upfront margin is the minimum amount you need to initiate a trade. In the equity segment, the exchange mandates (WEB) collection of at least 20% of the traded value, or Value at Risk (VaR) + Extreme Loss Margin (ELM), whichever is higher, for both delivery and intraday trades.

However, Zerodha collects the full value of delivery trades, also known as Cash and Carry (CNC) trades. For intraday trades, Zerodha offers up to 5 times leverage (equivalent to 20% of the traded value) through Margin Intraday Square off (MIS) and Cover Order (CO) for equities.

Adhoc margins

Adhoc margins are additional margins that exchanges impose as needed. The exchange may levy adhoc margins when it identifies increased risk due to potential defaults, market volatility, or other conditions that might result in greater losses. These margins are over and above the usual required margins, safeguarding markets and participants against unforeseen risks.

Mark-to-Market (MTM) loss margins

The exchange requires MTM loss margins in case of intraday losses.

Why Zerodha collects the full amount for equity delivery trades

Zerodha collects the full amount for equity delivery trades rather than 20% of VaR + ELM because when you purchase stocks using the CNC product type, you intend to take delivery of them. This requires full payment as it's not a leveraged trade.

The next trading day following your purchase, Zerodha, as the broker, must pay this money to the clearing corporation to secure your stocks for delivery. Hence, Zerodha collects 100% upfront margin for CNC trades. However, you can buy stocks for delivery with lesser margins using the Margin Trading Facility (MTF).

Derivatives margins

SPAN and exposure (upfront margin)

The exchange mandates the collection of SPAN and Exposure margins as upfront margins in the derivatives or F&O segment. However, for option buying, only the premium is required. The margin requirement for both intraday (MIS) and carry-forward (NRML) positions is the same because derivatives are inherently leveraged.

The margin blocked in your trading account for derivatives positions is called the Initial Margin and is the sum of these two components: SPAN and Exposure margins.

SPAN and Exposure margins will be blocked in your trading account for the duration of your futures trade. The initial margin value keeps changing daily due to its dependency on the futures price. Even though the lot size is constant, changes in the futures price lead to changes in margin requirements.

Reasons for increased SPAN and exposure margins

Several factors can increase your SPAN and Exposure margins:

• Exiting hedged positions: You'll face a margin shortfall if you exit a position that provides margin benefit in a hedged trade, thereby increasing the required margin. For more information, see Can exiting one leg of a hedged position lead to a peak margin shortfall?
• Expiry of hedged positions: Your required margin may increase if one or more contracts in your hedged portfolio expire. This is because the hedge may break, causing you to lose the margin benefit, resulting in a margin shortfall.
• Change in overall portfolio margin: Buying or selling one or more positions might lead to a change in overall portfolio margins, resulting in a margin shortfall.
• Volatility: The minimum margin required to hold a position might increase because of intraday volatility, leading to a margin shortfall.

Mark-to-market margin (MTM margin) for futures

Mark-to-market (MTM) in futures involves daily revaluation of open contracts to calculate profit or loss based on price changes in the underlying asset. It requires comparing your contract's entry price with the current market price and adjusting your account accordingly.

To facilitate this settlement, you must maintain additional funds (the MTM margin) in your trading account. This ensures you have sufficient funds to cover potential losses from open positions.

Physical delivery margins

Futures and Options (F&O) positions may require delivery of actual shares upon expiry. When you buy option contracts, there's no need to block SPAN and exposure margin in your account, as the margin requirement and risk are limited to the option's value.

However, due to new physical delivery rules, in-the-money (ITM) options now result in delivery of the underlying shares. The exchange imposes physical delivery margins on ITM options starting four days before expiration. These margins are calculated as a percentage of the applicable margins (VAR + ELM + Adhoc) of the underlying stock.

Commodity segment (MCX) margins

Initial margin (upfront margin)

The upfront initial margin includes the net buy premium and the Extreme Loss Margin (ELM), both of which must be collected in advance. When reporting margins, your upfront initial margin is the sum of the contract level initial margin, net buy premium, and ELM. Brokers must collect these initial margins before any trading activity takes place.

Reasons for increased upfront margins

Several factors can increase your upfront margins:

• Exiting hedged positions: You'll face a margin shortfall if you exit a position that provides margin benefit in a hedged trade, thereby increasing the required margin.
• Expiry of hedged positions: Your required margin may increase if one or more contracts in your hedged portfolio expire because the hedge may break, causing you to lose the margin benefit.
• Change in overall portfolio margin: Buying or selling one or more positions might change overall portfolio margins, resulting in a margin shortfall.
• Volatility: The minimum margin required to hold a position might increase because of intraday volatility, leading to a margin shortfall.

Other margins (non-upfront margin)

Non-upfront margin refers to margins that can be collected after taking a trade. Margins not included in the Initial Margin are classified as Other Margins. This category comprises Additional Margin, Special Margin, Tender Margin, Delivery Margin, and Concentration Margin, all of which the broker must collect. As Other Margin is not collected upfront, any shortfall can be collected until the next day (T+1 Day).

MTM margin (non-upfront margin)

For futures contracts, the profit or loss calculated at the end of each trading day, known as the mark-to-market margin, forms part of margin reporting and must be collected. In the case of options, the Exercise/Assignment Obligation at the contract's expiry is combined with the Mark to Market requirement for margin purposes.