What is a margin penalty, and why is it charged?

A margin penalty is a charge imposed for failing to maintain sufficient margin in a trading account. Clients are required by exchanges to maintain adequate margins for their trades and to transfer funds in the event of a margin shortfall, which means a deficit of funds or margin in the trading account.

There are two types of margin penalties:

1. Upfront margin penalty

Upfront margin refers to the margin that must be provided in order to initiate a trade. The broker will be charged an upfront margin penalty if the trader doesn't have sufficient margin in their account when entering a trade.

Example scenario

If the broker lets a trader enter a position with a minimum margin of ₹1.1 lakh (SPAN + Exposure), but the trader only has ₹1 lakh in their account, there will be a shortfall of ₹10,000, resulting in a penalty being imposed on that amount.

Effective November 1st, as per the regulations, if a margin penalty is imposed due to an increase in margins resulting from a change in the client's hedge position, the expiration of certain legs of the hedge, or the closure of one leg of the hedge, the penalty can be passed on to the client. To learn more, see Can exiting one leg of a hedged position lead to a peak margin shortfall?

2. Non-upfront margin penalty

Non-upfront margin pertains to the margins that should be fulfilled by the client after initiating a trade, following the fulfilment of the upfront margin requirement. If the client fails to provide the required funds within the deadline, it leads to a deficit and may result in a penalty. If there are marked-to-market (MTM) losses in futures contracts, the client has until T+1 day till 11.59 PM to add the funds. Failure to do so is considered a non-upfront margin deficit and can lead to a penalty. Additionally, ad-hoc margin requirements added by exchanges owing to volatility or physical delivery margins to stock F&O contracts in the last week of expiry are also deemed non-upfront margins. If a penalty is charged for non-upfront margins, the corresponding fund statement entry will be posted on the T+6th day, as margin reporting is due on T+5 days.

Visit tradingqna.com/t/nse-circular-on-short-margin-penalty-refund/136203/26 for more detailed examples of upfront and non-upfront margin penalties.