Can exiting one leg of a hedged position lead to a peak margin shortfall?
Exiting a hedged trade's low-risk leg is a common reason for peak margin shortfall. These shortfalls can occur despite a client having closed both legs of a hedged trade.
The clearing corporation (CC) takes four random snapshots of all intraday positions and margins across customers during the day to determine whether sufficient margins are available during those snapshots. If sufficient margins aren’t available either at the end of the trading day or in the intraday snapshots, a margin penalty is charged on the net shortfall amount. The penalty is 0.5% of the shortfall amount lower than ₹1 lakh and 1% for higher than ₹1 lakh. This can go up to 5% in the case of shortfall for more than three instances in a month. A peak margin shortfall can occur if a snapshot is taken when one leg of the trade is closed and the other is yet to be closed.
- Mr X transfers ₹2,00,000/- to the trading account and takes a NIFTY long position in the April contract, the margin blocked is ₹1,60,000/-
- Mr X takes a NIFTY short position in the May contract. The margin blocked is now ₹30,000/- (on account of the position currently being hedged; free balance in account: ₹1,70,000/-)
- Mr X takes a BANKNIFTY long position in the April contract. The margin blocked is ₹1,60,000/-
- In this case, Mr X has fulfilled all margin requirements.
- Mr X now closes the first leg of the NIFTY position (long April), as a result of which the total margin required in the account goes up to ₹3,20,000/-
- The system of a trading member raises an alert and informs the client of short margins. NSE takes a snapshot of the position at this instance and captures ₹3,20,000/- as the margin required.
- The client, on receipt of an alert from the trading member, closes the other leg of NIFTY, as a result of which the margin required drops to ₹1,60,000/- (Since only the BANKNIFTY position is open)
There is a peak margin shortfall despite the client having squared off the outstanding positions and complying with the margin requirements on an end-of-day basis.
To learn more about margin penalties, see zerodha.com/z-connect/queries/stock-and-fo-queries/margins-margin-penalties-when-trading-with-leverage.