Why Exiting a Hedged Position Partially Can Result in Margin Penalties

Post Date : April 29, 2025

Yes, exiting one leg of a hedged trade can lead to a peak margin shortfall — even if both legs are eventually closed and the margin requirements are met at the end of the trading day.
Peak margin shortfalls occur due to the way clearing corporations (CC) monitor intraday margin sufficiency. The CC takes multiple random intraday snapshots to evaluate whether the required margin is maintained:

• Commodity segment: 8 random snapshots
• All other segments (Equity, F&O, Currency): 4 random snapshots

If at any of these snapshots (or at the end of the trading day) the available margin is insufficient, a penalty is applied on the shortfall amount. The penalty structure is:

•  0.5% for shortfall amounts less than ₹1 lakh
• 1% for shortfall amounts exceeding ₹1 lakh
• Can go up to 5% in cases of shortfall on more than three occasions in a month

Why Does This Happen?
A peak margin shortfall typically arises if a snapshot is captured after one leg of a hedge is exited but before the other is squared off. In that moment, the system perceives the open position as unhedged, thereby demanding a higher margin.

Example Scenario
1. Mr. X transfers ₹2,00,000 to his trading account and initiates a long NIFTY April futures position.
o Margin blocked: ₹1,60,000
o Free balance: ₹40,000

2. Mr. X adds a short NIFTY May futures position, creating a hedge.
o Margin blocked drops to ₹30,000 due to the hedge
o Free balance increases to ₹1,70,000

3. Mr. X opens a long BANKNIFTY April futures position.
o Margin blocked: ₹1,60,000
1. margin used: ₹1,90,000
o Free balance: ₹10,000

4. All margin requirements are currently met.

5. Mr. X closes the long NIFTY April position, breaking the hedge.
o Required margin increases to ₹3,20,000
o Margin shortfall: ₹1,20,000

6. A snapshot is taken by the exchange at this point.
o The system records a shortfall, even though it’s temporary.

7. Mr. X quickly closes the short NIFTY May position.
o Margin requirement drops to ₹1,60,000
o No shortfall remains by the end of the day

A peak margin shortfall may still occur even if the client has squared off all positions and complied with margin requirements by the end of the trading day. In such cases, the margin penalty, as determined by the exchange, will be passed on to the client.
Key Takeaways for Traders

• Always exit both legs of a hedged position simultaneously if possible.
• Ensure sufficient free margin is available to avoid temporary shortfalls.
• Monitor margin alerts raised by the trading platform to act swiftly.

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