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