How Exiting One Leg of a Hedged Position Leads to a Margin Shortfall
Key Takeaways
- Exiting one leg of a hedge increases the margin requirement, which can cause a shortfall if the required margin is not maintained at the time of the snapshot.
- Even if compliance is restored later, penalties may still be applied based on previous snapshots.
- Always ensure sufficient free balance before modifying hedged positions to avoid unnecessary penalties.
Snapshot Mechanism: The Clearing Corporation (CC) captures 8 random snapshots for the commodity segment and 4 random snapshots for other segments during the trading day. These snapshots record intraday positions and margin requirements at specific points in time.
Margin Penalty: If the required margin is insufficient during any snapshot, a margin penalty is applied as below
- 0.5% of the shortfall if the amount is below ₹1 lakh.
- 1% for shortfalls exceeding ₹1 lakh.
- Up to 5% for more than three shortfalls in a month.
Example: Here’s an example scenario explained in a tabular format to illustrate how exiting one leg of a hedged position (voluntarily or due to contract expiry) can lead to a margin shortfall:
| Step | Action | Margin Blocked (₹) | Free Balance (₹) | Explanation |
| 1 | Client deposits ₹2,00,000 and takes a NIFTY long position (April contract). | 1,50,000 | 50,000 | The client has a total balance of ₹2,00,000 and a margin blocked for the long NIFTY position is ₹ 150000. |
| 2 | Client takes a NIFTY short position (May contract), creating a hedged position. | 40,000 | 1,60,000 | The hedge reduces the overall margin requirement to ₹ 40000, which results in a free balance increasing to ₹160,000. |
| 3 | Client takes a BANKNIFTY long position (April contract). | 1,50,000 | 50,000 | The client now holds three positions, resulting in total margin block of ₹ 150000 and a free balance of ₹50000 |
| 4 | Client now closes the NIFTY long position (April contract). | 3,00,000 | -1,00,000 | Closing one leg of the hedge increases the total margin requirement to ₹300000 and a negative balance of ₹100,000. |
| 5 | Clearing Corporation captures a snapshot when the margin is insufficient. | 3,00,000 | -1,00,000 | Since the snapshot records a negative balance, a shortfall of ₹1,00,000 is captured, and a penalty is imposed |
| 6 | Client closes the NIFTY short position (May contract) and complies with margin requirements. | 1,50,000 | 50,000 | Even though both legs of the NIFTY trade are closed, and free balance is restored, the earlier snapshot recorded a shortfall, leading to a penalty. |
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