Peak Margin: What it Means, Its Importance & Calculation

To ensure that buyers and investors actually possess the necessary funds for a transaction, exchanges require a margin. Simply put, the margin represents the minimum amount of funds or securities you must hold in your account to trade at a certain value successfully. SEBI launched a benchmark called "Peak Margin" to provide more transparency in this respect.

Peak Margin was introduced on December 1, 2020. In this case, exchange and clearing companies must take at least four random snapshots of transaction positions to calculate margin obligations. The day's peak margin is considered the highest margin of these four snapshots. To understand the peak margin's meaning and importance and its different phases in margin trading read the article below.

Peak Margin Meaning

To reduce the leverage on traders and investors in Indian stock market, SEBI has implemented a Peak Margin Rule that takes effect in December 2020. To achieve greater transparency in trade, SEBI introduced this measure. To ensure stricter control of leverage, the peak margins have been set up in a regulated manner. As a result of the introduction of the peak margin, most of the excessive speculation has also been controlled since the margin started to be collected in advance. 

Until now, the obligation margin has been based on the trading position percentage at the end of the day. To calculate clearing corporations, exchanges, and clearing companies shall take snapshots of four random trading positions as soon as the Peak Margin Regulation has been introduced. The day's peak margin is considered the highest of the four.

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What Is The Importance Of Peak Margin?

Traders and investors can buy securities on credit using a margin. If the margin requirement is low or below, the trader requires less capital to enter a transaction. This resulted in a situation of high leverage. The margin has been set at a higher level to implement stricter leverage limits, which affects the risk that traders can take on their positions. Even if the margin is picked up in advance and not at the end of the day, the peak margin can control too much speculation. This arrangement does not permit speculative traders to increase their stakes in a day for which few funds are available.

The peak margin has set strict limits on leverage. If a transaction were affected, that would be a risk factor for the trader. The fact that margins are collected early is probably the most important part of Peak Margins. The peak margin has facilitated risk reduction for brokers.

What Are The Different Phases Of Peak Margin?

In four phases, the peak margin started to take effect. 

1. A 25% peak margin had to be reached during the first phase, from December 1, 2020, until February 28, 2021. 
2. There was a need for 50% and 75% peak margins for the 2nd and 3rd phases. 
3. It is necessary to achieve a peak margin of 100% during the final phase, which starts on September 21, 2021. 
4. In the last stage, a trader must have an adequate margin of no less than 3 Lakhs to sell something over 10 Lakhs.

What Is Peak Margin Rule And Penalty For Violating This Rule?

As per this rule, traders must keep a certain minimum margin in their trading accounts at all times based on the highest intraday exposure levels they have had during an entire trading day. 

Consider the example below;

Let's say you have a trading account with a broker, and you start the day with Rs. 1,00,000 in your account. You're buying stocks worth Rs. 2,00,000 during the trading session, the highest exposure you've had all day. You must maintain at least a 25% margin on your highest intraday exposure to comply with SEBI's peak margin rule. Well, you've got to have at least Rs. 50,000 in this case. This Rs. 50,000 (25% of Rs. 2,00,000) is in your account as margin.

The broker shall have to square off open positions for your margin level to be returned to the required amount if the account balance falls below this threshold. The broker sells the stocks you've purchased previously to compensate for a margin shortfall. Depending on the discretion of SEBI, penalties may range from fines to suspension of trading privileges for failure to comply with the peak margin rule.

How Does The Peak Margin Rule Affect Investors And Traders?

Due to the new margin rules, many segments have been affected. However, the two most important affected parties must be Traders and Brokers.

The trading community has been affected and is also annoyed that they will have to make deposits of all SPAN margins, which will affect trade volumes. Previously, they could have gotten up to 30x, 50x leverage. However, due to this new rule, the leverage acquired will be derived from SPAN margins. The brokering community also has a negative view of the rules because they impact volume, which will directly affect its earnings.

Why Was The Reform In Margin Calculations Needed?

Each stock and derivative has its margin requirement, determined by exchange capital based on volatility. This margin is exactly proportional to the volatility in the market. The brokers increased their commissions to increase the number of transactions and attract new customers. Therefore, the trader has been able to take on very risky transactions with little or no capital. The regulation of peak margins has been beneficial to stockbrokers. Because if the deal goes wrong, it's going to end badly. Then, the trader was losing a lot of money, but his broker disappeared. Consequently, brokers are exposed to systemic risks regarding high-risk gambles by traders.

Conclusion

So if you  compared the leverage requirement before, you would need to increase the capital needed for certain transactions, and this could, in turn, affect your return on investment. However, it is important to note that while leverage may help you increase your profits, it may also increase your losses. For this reason, it is useful to establish a greater degree of control through checks such as the peak margin. Check out the BlinkX trading app to get leverage on your investment safely and securely in different trading instruments..