Zerodha's RMS policy: Squaring off positions for Margin Trading Facility (MTF)
Zerodha’s Margin Trading Facility (MTF) allows clients to trade using borrowed funds. To manage risks, Zerodha may square off positions under certain conditions, with an auto square-off charge of ₹50 + GST applied to each squared-off position. This guide explains the key rules and order of priority for squaring off positions in simple terms.
Squaring off of positions
Zerodha may square off MTF positions under the following conditions:
- Pledge request not accepted: If the pledge request for MTF is not approved on the trade day, the MTF shares will be converted into CNC holdings on T+1 day. Users must either add sufficient funds or exit the position. If no action is taken by the client, Zerodha will square off the position on T+2 day.
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When the position is in a loss: Notifications are sent when the loss on Zerodha’s funded portion crosses 50% and again at 70%. If the loss hits 80%, the position is automatically squared off even if there’s enough balance in the account. For example, if the price of a stock is ₹100, the margin required to be brought in by the client is ₹40, and Zerodha funds the remaining ₹60 on which interest is charged daily. If the price of the stock falls more than 80% of ₹60, the position will be squared off.
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When the account is in debit:
- Notifications are sent at 8 AM before squaring off begins. An alert is triggered at a 10% loss of the amount funded by the client.
- Positions are squared off if the loss exceeds 20% of the client’s funded amount. For example, if the client funds ₹50,000 and losses exceed ₹10,000, Zerodha may square off positions proportionately to recover the debit balance.
- Changes in stock category: If a stock held under MTF is reclassified and removed from Group 1 securities, Zerodha notifies the client and squares off the position within 7 days. For example, if a stock is moved out of Group 1 on December 1, the position will be squared off by December 8 if not closed by the client.
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Corporate actions: Zerodha squares off positions one day before the ex-date for specific corporate actions like mergers, except for bonuses, stock splits, dividends, and rights issues. For example, if a stock’s ex-date for a merger is December 10, the position is squared off on December 9. At Zerodha's discretion, notification may be sent before squaring off a position.
Priority in squaring off positions
When multiple positions need to be squared off, Zerodha follows a specific order of priority:
- Loss-making F&O positions are prioritised: Futures and Options (F&O) positions with losses are squared off first to avoid penalties or additional costs.
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Handling F&O and MTF Positions Together: If a client holds both F&O and Margin Trading Facility (MTF) positions, the priority for squaring off is as follows:
- Both F&O and MTF positions in loss: The F&O position is squared off first.
- MTF in loss and F&O in profit: The MTF position is squared off first.
- MTF in profit and F&O in loss: The F&O position is squared off first.
- Both F&O and MTF in profit: The F&O position is squared off first.
- Impact of collateral margin on squaring off: If there is enough collateral margin in the account and there is a debit balance due to MTF, positions may not be squared off. Instead, the collateral margin is utilised, and interest is charged on this utilised collateral margin. If the account has a collateral margin worth ₹10,000 and the debit balance is ₹8,000, positions are not squared off. Delayed payment charges are levied on the over-utilisation of collateral margin, i.e. on ₹8,000.
- Recovering debits from F&O Obligations: If the account goes into debit from F&O-related obligations but there are no F&O positions left to square off, the MTF positions are squared off to recover the amount.
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