Important Update on Funds Required for Trading3 min read
The trading balance or available balance that you see in your ‘funds’ section is the sum of both collateral and cash funds. Collateral is the amount you receive after pledging your stock holdings. Today, when you sell any option contract or trade in equity intraday or trade in futures, you can fund 100% margin requirement with collateral requiring 0% cash. In comparison, when you buy any stock on delivery or any option contract, 100% of the margin is required in upfront cash.
What is the update on funds requirement?
Starting May 2, 2022, you will have to maintain at least 50% funds in cash compulsorily in your trading balance. This change is due to the SEBI mandate which says that the client has to maintain at least 50% in cash margin to trade. This will impact the way in which you use collateral while trading. Below is the summary of the funds requirement based on trading activity.
How does it impact you?
Let us understand this change with a few examples.
Let’s say you have 10 Lakh trading balance and out of which 8 Lakh is collateral margin obtained from pledging stocks and 2 Lakh is in cash. With this new rule in place, you will only be able to use only 2 Lakh from your collateral balance and 4 Lakh (2L Cash + 2L Collateral) in total from trading balance.
This also means that to use the remaining 6 Lakh of collateral funds, you will have to add funds worth 6 Lakh in cash.
In another instance, let’s say you have 5 Lakh in trading balance and 100% of it is collateral funds. In this case you will not be allowed to trade unless you add funds in cash. To use the entire collateral funds of 5 Lakh, you will have to add 5 Lakh worth of cash funds.
For someone who does only buying and selling of stocks in delivery and occasionally buys option contracts. In this case, you will have to have 100% of your funds in cash anyway since collateral cannot be used for such transactions.
What led to this update?
This change in cash funds requirement is part of the bigger objective of segregating funds at client level. Earlier this segregation of cash and collateral funds used to be at broker level. But, there have been instances where client funds have been misappropriated by the brokers. For example, Client A brought 10 Lakh in cash and Client B brought 10 Lakh in collateral to a broker. The broker then allocated cash funds to Client B as per requirement which in turn created unnecessary risk for Client A who brought everything in cash. To safeguard such client interests and to facilitate transparency, SEBI has come up with this regulation where the aggregation of cash and collateral will be at the client level instead of broker level.
Conclusion
- Starting 2nd May, 2022, you will have to maintain minimum 50% funds in cash in your trading balance.
- Minimum 50% margin instead of 0% earlier, will be required in cash for trading in equity intraday, selling options and trading in futures.
- 100% margin will continue to be required in cash for equity delivery and option buying.
Disclaimer: Investments in securities market are subject to market risks, read all the related documents carefully before investing. This content is purely for educational, information and investor awareness purpose only. Please refer www.paytmmoney.com for further information.
