What is Margin Shortfall? Definition and Best Example 2021
Margins play an extremely essential significance in derivatives (Futures and Options). To Understand margin shortfall, it is critical to understand the significance of margin trading in the derivatives market. Let’s Discuss it with Penalties and examples.
What is Margin Shortfall?
Brokerages offer credit for futures trading in the F&O sections in accordance with their guidelines. In reality, these derivative positions are extremely risky owing to their fluctuating character and the little upfront capital needed to trade.
Accordingly, any negative price action can result in significant damages to the trader, broker, and counterparty. To maintain flawless transactions, a specific upfront money is paid to carry the futures position. This upfront money is termed as margin, and any gap in the upfront balance is called a margin Shortfall.
What is Margin Shortfall Penalty ?
If there is a shortfall on overnight positions kept in the brokerage account as specified by the exchange, the exchanges will charge a margin shortfall penalty. This fee is only applied to overnight margin shortfalls only. It is not relevant for Intraday holdings.
It is applied on everyone including Stock, commodities, and currency exchanges. You can check out the type of report you need on the links below and download the same from NSE website.
Shortfall Penalty Fees
If the overnight margin is lower than 1 lakh and the margin shortfall is less than 10% of the relevant margin, a penalty of 0.5 percent is imposed; if the margin exceeds 1 lakh or the margin shortfall surpasses 10% of the relevant margin, a penalty of 1% is imposed on the margin shortfall.
Note:
If the shortfall extends more than 3 days, a 5% margin penalty will be applied per day after the 3rd day of the shortfall. All penalties received in accordance with SEBI regulations will be submitted to the Investor Protection Fund by all exchanges.
Originally published at https://profitmust.com on May 27, 2021.
