Definition
Margin (Trading)
Margin is the collateral a trader must deposit to cover potential losses on a position, comprising components such as SPAN, exposure and mark-to-market margin in the Indian derivatives market.
Indian exchanges and the clearing corporation require upfront margin even for cash-market trades, and a layered margin (SPAN plus exposure, plus extreme-loss and mark-to-market) for derivatives. SEBI's peak-margin norms require collection of the full applicable margin upfront, ending the old practice of intraday under-margining.
Margin can be met with cash or pledged securities under the pledge/re-pledge system, with a haircut. Adequate margining is what allows the CCP to guarantee settlement; a shortfall triggers penalties or forced square-off of positions to protect the system.
Related terms
- Clearing CorporationA clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
- Margin Trading Facility (MTF)Margin Trading Facility is a SEBI-regulated facility that lets investors buy shares by paying only part of the value upfront, with the broker funding the balance against the shares as collateral.
- Pledge and Re-pledgePledge and re-pledge is the SEBI-mandated mechanism for using securities as collateral, where shares stay in the client's demat account and are pledged in favour of the broker, who re-pledges them to the clearing corporation.
- Square-offSquare-off is the closing out of an open position by taking an equal and opposite trade, either voluntarily by the trader or automatically by the broker when margins fall short or intraday positions near the cutoff.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.