Whenever an order is placed in any segment of the Exchange, you need to pay upfront margins to your stock brokers before the order is accepted.
These upfront margins are in the form of SPAN (Standard Portfolio Analysis of Risk), VAR (Value at Risk), ELM (Extreme Loss Margins) and Ad-Hoc margins levied by the Exchanges.
To know more about SPAN, VAR, ELM and Ad-Hoc margins, Click Here.
These margins need to be maintained with your stock broker at all points in time until settlement is completed (in Cash Segment) or until the expiry of the open position (in Derivatives Segment).
Sometimes, it may happen that despite having adequate margins while placing orders, there could be margin shortfall after taking positions successfully, leading to margin shortfall penalty.
Margin Shortfall is the amount by which margin levied on your positions is more than the margin available in your account with the stock broker.
The usual formula applicable for margin shortfall is: Applicable Margin on your portfolio – Available Margin in your account = Margin Shortfall
Exchange levies a certain percentage of margin shortfall in the form of penalties.
Below are some of the reasons due to which, there could be margin shortfall after taking positions.
All these types of margins are variable in nature and they are required to be maintained with the stockbroker until settlement is completed (in Cash Segment), or until the expiry of open positions (in Derivatives Segment).
SPAN/VAR is published by Exchange 5 times in a day at regular intervals. Though the margin percentages remain more or less consistent throughout the day, it could increase on any particular stock on high volatility days. Hence, if you have placed the exact amount as margins that was required to take positions, the margin requirement can go beyond what was initially maintained during high volatility days, leading to margin shortfall.
For Example, if you have kept Rs. 105,000 in your trading account and have taken positions worth Rs. 500,000 in a particular stock. Margin blocked on the position was Rs. 100,000. You have Rs. 5,000 as free margins in your account. If the margin requirement increases by Rs. 10,000 during the day due to significant price fluctuation, you will have a margin shortfall of Rs. 5,000.
Extreme Loss Margin Percentage* is usually fixed for a particular stock, unless the stock falls under specific criteria set by the Exchange.
It may happen that Ad-Hoc Margin was not applicable when the position was taken, however, if the stock meets various parameters set by the Exchange, it can be charged even after position was taken. This ad-hoc margin will then be required to be maintained with the stock broker if the position is open, otherwise, it could lead to margin shortfall.
BTST, as the name suggests, is an order type where you buy a stock on a particular day and square it off on the next trading day, without receiving delivery. BTST, as an order type, does not, by default, lead to margin shortfall.
As per Exchange margin regulations, margins need to maintained for sell transactions in Cash Segment as well, unless you have the stock already available in your demat account. If you have the stock in your demat account, it could be delivered to Exchange as Early Pay-in (EPI) and hence you will not be levied margin on the sell leg of the trade.
If you buy a stock in cash segment, you will receive the credit of shares in your demat account on T+2. Hence, in case of BTST order, you don’t already have the shares in your demat account since you have executed the sell leg on T+1. In such cases, instead of margins getting free completely on squaring off the open position, you will be charged separate margins on buy as well as sell, leading to double margin requirement. This could lead to margin shortfall if you don’t have the necessary margin available for both buy as well as sell in your account.
Stock Futures and Options positions held till expiry are settled physically since October 2019, as against cash settlement which was the case before October 2019. All the open positions in stock futures and options on expiry day will need to be delivered in the form of actual shares.
Delivery margins, though not charged while taking positions, are levied on all the potential physically deliverable positions, starting 4 days before the expiry day. It continues to be levied until the positions are squared off before expiry or settlement is completed after expiry.
For example – If the expiry day is on Thursday, and you have an open position in TCS options contract on the previous Friday (Expiry -4), delivery margin will start getting levied, until open positions in TCS options contract are squared off before Thursday, or stocks of TCS are physically settled on the next Monday (Expiry+2)
Delivery margins shall be computed as per the margin rate applicable in Cash Market segment (i.e VAR, Extreme Loss Margins) of the respective security. If these margins are not maintained in your trading account whenever they are levied, it will lead to margin shortfall.
If you sell shares out of your demat account, there is no additional margin charged on the sell leg, since the shares are meant for delivery, and they are eventually delivered in the form of Early Pay-in.
Instead, as per guidelines issued by SEBI in December 2020, if you sell shares from your demat account, 80% of the sale proceeds gets available on the same day that you can use to enter into another trade or take another position. If you buy back the same shares on the same day, it becomes an intraday trade, and the delivery gets withheld, resulting in forfeiture of margins against 80% of the sell value, as previously mentioned.
There is no margin shortfall if -
80% of the value of shares sold is bought back
OR
80% of the sell value is used as margins to take any other position
In case you intend to do both, or if you wish to buy back the same shares beyond 80% of the value of shares sold, you will need to bring in additional margin in the form of cash / pledging of stocks, otherwise this will lead to margin shortfall.
SPAN margin on F&O positions gets levied on the entire portfolio based on the risk characteristics of your holdings. If your portfolio is sufficiently hedged, the margin requirement will be lower while taking positions. If you square off any position, thus removing the hedge on your portfolio, the margin requirement increases, which might lead to a margin shortfall.
Similarly, for calendar spread positions in case of F&O, the SPAN and ELM charges are almost one-third of the normal margins. If you square off any one leg of the calendar spread, resulting in your position being naked, the margin requirement increases, which might also lead to margin shortfall.
Calendar Spread positions are those where you have a Long Position in one expiry month, and Short Position in the same contract for any other expiry month.
For Example:
The below position is a calendar spread position.
Buy - TCS Futures – 10 lots – September 2022 Expiry
Sell – TCS Futures – 10 lots – October 2022 Expiry
The below is NOT a calendar spread position
Buy - TCS Futures – 10 lots – September 2022 Expiry
Sell – TCS CE Options – 10 lots – October 2022 Expiry
The practice of settling out profits and losses at the end of every trading day is known as Mark to Market (MTM) adjustment. During the day, if you have taken the position and have sufficient margin in your account, there is no margin shortfall. However, if at the end of the day, the value of your holdings goes down, you will have to make the payment within T+1 day or else you will face a margin shortfall leading to a penalty.