Understanding on Margin Shortfall Penalty

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Margin Shortfall penalty

As per SEBI (Securities Exchange Board of India) rules, a margin shortfall penalty is levied on the overnight position held in the trading account without sufficient margin. In our previous article, we explain the margin system in derivative trading, once read the article before getting into this.

If you want to understand the margin shortfall and penalties. It’s crucial to understand the basic concept of margin trading in the derivatives segment.

Future and options trading itself as a leveraged product moreover some brokers offer high leverage on derivative trades. In fact, any adverse movement in the underlying asset price can lead to heavy losses for the trader.



Margin Shortfall Penalty in Future Trade:


For better understanding, we take the SBIN January 2021 future contract. SBIN future was traded at 270 and the lot size is 3000. If you want to long on the trade, the initial margin should be 280000 but the original contract will be 810000 (3000* 270). As per exchange norms, the initial margin consists of the SPAN margin and exposure margin.

If any change in price, it will reflect in daily MTM, Marking to market or mark to market is a mere accounting term that involves adjusting the profit or loss on a daily basis.

Day Margin Future price MTM Shortfall
T 280000 269  -3000 3000
T+1 280000 272 + 9000
T+2 280000 260 -36000 30000
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As long as you hold the long position, MTM is applicable. Hence it’s a long contract, whenever the price goes below your entry price means, the position is showing an unrealized loss of 30000 in T+3 days. Here exchange imposes the margin penalty in the following manner.

A short collection of margin Penalty Percentage
(< Rs 1 lakh) And (<10% of initial margin) 0.5%
(=Rs 1 lakh) Or (=10% of initial margin ) 1%


Let us go to our example, the T+1 day margin shortfall was 3000, and the penalty for the day is 0.5% of 3000 that’s 15 Rs. We are assuming that there is no additional cash balance in the trading account. The client has only 280000 in his account. If SBIN’s future price drops to 260 on T+3 day, the margin shortfall will be 30000 but the penalty is levied on 1% of the margin shortfall that is 300 Rs.


If the initial margin is less than 1 lakh AND the margin shortfall is less than 10% of the total margin then, 0.5% of penalty is levied and in case if the margin exceeds 1 lakh OR the margin shortfall exceeds 10% of the total margin then, 1% margin is levied on the margin shortfall amount.

As per the National Stock Exchange of India, if any non-collection of margins for a client continues for more than 3 consecutive days, then a penalty of 5% of the shortfall amount shall be levied for each day of continued shortfall beyond the 3rd day of the shortfall.

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The interesting fact about the margin shortfall is, if a short collection of margin from the client is caused due to the movement of 3% or more in the Nifty 50 index on a given day, then the penalty for margin shortfall shall be imposed only if the shortfall continues to T+2 day.

Let’s take one more example for better understanding, the stock Power Finance Corporation’s future initial margin requirement is 80000 on T day. The company has announced the earning results on the same day, the stock price was fall more than 10% and the MTM loss was 15000.

In this situation, the margin requirement is less than one lakh, the margin deficit is greater than 10% of the applicable margin. Hereafter a 1% penalty will be levied on the shortfall amount of 150 on T+1 day.

Take the next scenario, if the stock price continues to fall due to lower earnings results then the margin penalty will be 1% for the next three days (T+3). If the margin shortfall is continuous, then fromT+4 day the debt amount would be 5% of the respective shortfall amount. Remember one thing in mind, a 5% penalty will be levied every day until the contract expired.

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  • Lack of awareness in margin shortfall penalty that’s why we come up with the new articles for better understanding and educate the traders.
  • Always keep excess margin in your account before taking the position to avoid penalty.
  • Keep check your MTM loss and try to settle the amount by EOD.
  • Successful trading is defined by how you are going to manage the margin money ineffective way!


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