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Why are margins blocked for F&O positions higher than exchange mandated margins?

SEBI has always mandated upfront collection of margins for all derivative trades. There were checks carried out by the stock exchange to verify whether brokers had collected sufficient margin for client trades. Penalties were charged if the broker had short collected margins on overnight positions. These penalties were usually recovered from the client. Up until 2021, these margin checks were restricted to overnight positions only as a result of which brokers would provide leverage to clients and allow them to trade with lesser margins for intraday.

However, since 2021, peak margins have been introduced after which the Stock Exchanges started monitoring margins for intraday positions too. Any shortfall in derivative margins intraday would be classified as upfront margin shortfall which was liable to penalty and brokers were also restricted from pass on penalty arising out of such shortfalls from the client. Visit zrd.sh/margin-penalty-leverage to learn more.

While Zerodha will always insist on upfront margins, one must understand that there are instances where the margin on an existing portfolio can go up. Following are few reasons:

  • Increase in volatility leading to increase in margins.
  • When the market moves against a short option position, the margin goes up to cover for the risk unlike in futures where marked to market losses are debited.
  • Any position that is hedging the portfolio being exited, leads to increase in margin.

The stock exchange classified this increased margin also as upfront margin and stipulated that any shortfall arising out of such increase would be liable for penalty which could not be recovered from the client. Given this stance, brokers had to resort to closing positions of clients with the slightest increase in margin. Since this is a suboptimal solution, brokers resorted to charging slightly higher margins than exchange stipulated margins to avoid a situation of having to close the position.

At Zerodha, additional margins are blocked as follows:

Segment Additional margins blocked as a percentage of required margins
F&O 4%
MCX 3%
CDS 3%

These are subject to change at Zerodha's discretion.

Example scenario

  1. The margin required for selling Nifty 17300CE is ₹1,05,000 and the available funds in the account is ₹1,05,000.
  2. Due to the volatility Nifty moved 1% up.
  3. The margin required for this position increased to ₹1,09,000 because of the volatility in the market and underlying price movement.
  4. Assuming that the client doesn’t have additional funds in the account. There will be an upfront margin shortfall of ₹4000  (₹1,09,000 - ₹1,05,000 = ₹4000).
  5. The broker needs to pay the upfront margin penalty levied on this shortfall amount of ₹4000. To avoid this the broker may square off the position.
  6. To avoid upfront margin penalty and the position from being squared off additional margins are blocked when taking a trade.