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Recently I sold options in Bank nifty. I tried to square off the positions when the market went against my view. But, the request got rejected and received a message as “margin short fall”. But at the time of exiting my fund balance is 7000. What is the reason?
What are Margins and Margin Shortfall Penalty?
You need not panic if you receive a margin shortfall penalty from the stock exchange. It is a simple fine that is levied by SEBI on those traders failing to maintain sufficient margins for all positions in trade options.
Essentially, you will be levied to pay a penalty whenever there is a margin shortfall. Such a margin shortfall may occur due to an increase in margins by exchanges, or stapled with market losses or on the removal of spread or hedge position.
You as an investor must follow the regulated SEBI rules such as the updated SPAN, and Exposures. You must maintain stock physical delivery margins when you are allocated with derivatives all the time.
Otherwise , you may fall prey to two types of margin shortfall penalties and they are EOD & Peak Margin Shortfall.
The penalty is applied on your margin shortfalls by the stock exchanges and usually, it will be a percentage of the shortfall amount.
Another additional amount on the penalty known to be GST (18%) shall be applicable, and likely to be deducted from the trading account.
Reasons that Bind to Margin Shortfall
When you take an option position there may be an increase in margin and this can be due to three specific reasons.
Balancing the Margin Shortfall:
Percentage of the Margin Penalty:
The penalty structure shall be applied when you encounter situations such as : short reporting by you (client) or absence of clearing members per instance or peak margin.
If the margin held by you (client) is less than 1 lakh or less than 10 percent of the applicable margin then the penalty will be 0.5 percent. Likewise, margin > 1 lakh or > 10 percent of the applicable margin, the penalty will be 1.0 percent.
If the margin shortfall is more than 3 consecutive days then the penalty will be 5 percent and if the margin shortfall continues for more than 5 days in a month then penalty will be 5 percent each day.