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

The penalty for not maintaining sufficient margins in the trading account is known as margin penalty. Exchanges require clients to maintain sufficient margins for the trades in their accounts and transfer funds if there’s a margin shortfall. Margin shortfall means that there’s a shortage of funds or margin in the trading account.

There are two types of margin penalties:

  • Upfront margin penalty

Upfront margin is the margin required to enter a trade. An upfront margin penalty is levied on the broker if there isn’t sufficient margin in a trader’s account at the time of entering a trade. If a trader had ₹1 lakh in the account and the brokerage firm allowed the customer to enter a position with a minimum margin (SPAN +Exposure) of ₹1.1 Lakh, this would mean a shortfall of ₹10,000, resulting in a penalty on the shortfall amount.

  • Non-upfront margin penalty

Non-upfront margin includes all such margins that need to be collected after the client enters a trade (after fulfilling the upfront margin requirement). When the client does not fund such margin requirements on time, it leads to a shortfall where a penalty may be charged to the client. If there are marked-to-market (MTM) losses in a futures contract, there is time until T+1 day to add the funds. If the funds are not added, it is considered a non-upfront margin shortfall and a penalty is applied. Similarly, when exchanges add ad-hoc margin requirements owing to volatility or physical delivery margins to stock F&O contracts in the last week of expiry, they are considered non-upfront margins. If a non-upfront margin penalty is incurred, the entry on the fund’s statement will be posted on the T+6th day since the due date for reporting margin is 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.