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When can peak margin penalty be levied while closing hedged trade?

SEBI requires the clearing corporations to take snapshots of intraday positions at least 4 times a day and calculate margins on intraday positions. A margin penalty can be levied if adequate funds and collateral are not maintained during the snapshot.

Exiting the low-risk leg of a hedged trade is a common reason for peak margin penalties. The margin penalty may be levied despite a client having closed both legs of a hedged trade. This can happen if the peak margin snapshot is taken at a time when one leg of the trade is closed and the other is yet to be closed.

Example Scenario

  1. A client named Mr X transfers ₹2,00,000/- to the trading account to trade in the F&O segment.
  2. Mr X takes a NIFTY long position in April contract - margin blocked is ₹1,60,000/-
  3. Mr X takes a NIFTY short position in May contract - margin blocked is now ₹30,000/- (on account of the position currently being hedged; free balance in account: ₹1,70,000/-)
  4. Mr X takes a BANKNIFTY long position in April contract - margin blocked ₹1,60,000/-
  5. In this case, Mr X has fulfilled all margin requirements.
  6. 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/-
  7. The system of a trading member raises an alert and informs the client of short margins.
  8. NSE takes a snapshot of the position at this instance and captures ₹3,20,000/- as the margin required
  9. 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)

In this example, an unnecessary penalty gets levied for being short on peak margins, despite the client having squared up the outstanding positions and complying with the margin requirements on an end-of-day basis.

To know more about the scenarios where the peak margin penalty will be levied, see Why have I been charged margin penalty?