SEBI has always required brokers to collect margins upfront for all derivative trades. Previously, the stock exchange only checked if sufficient margin was collected for overnight positions, and brokers would often provide leverage to clients for intraday trading. If a broker had short-collected margins on overnight positions, penalties were charged and recovered from the client.

However, since 2021, the stock exchanges have started monitoring margins for intraday positions as well and introduced peak margins. Any shortfall in derivative margins intraday would be considered an upfront margin shortfall and liable for penalty. Brokers are no longer allowed to pass on the penalty resulting from such shortfalls to clients. To learn more, visit zrd.sh/margin-penalty-leverage.

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 margins 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.

Zerodha's policy mandates upfront margins at all times, but it is essential to note that in some cases, the margin on an existing portfolio may increase. The following are a few reasons that could cause this to happen:

• 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 an increase in margin.

The increased margin was classified as an upfront margin by the stock exchange, and any shortfall resulting from this was subject to a penalty that brokers could not recover from their clients. As a result, brokers were forced to close clients' positions at the slightest increase in margin. To avoid this suboptimal solution, brokers started charging slightly higher margins than the exchange-stipulated margins.

At Zerodha, additional margins are blocked as follows:

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 are ₹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 an upfront margin penalty and the position from being squared off, additional margins are blocked when taking a trade.