What is Margin Shortfall?

When trading, traders are required to maintain a minimum trading account balance, known as the margin. A margin shortfall is said to occur when this available margin is less than the required minimum set by the broker.

For instance, you want to buy shares worth ₹1,00,000, but you only have ₹25,000. With a Margin Trading Facility (MTF), your broker can lend you the remaining ₹75,000, provided you maintain a margin of 25%—this means your own money should cover at least 25% of the total investment.

Let’s have a look at different cases to understand how margin shortfall can occur. 

• Initial Investment:
• Buy Price/Share: ₹1000
• Number of Shares (Qty): 100 shares
• Total Buy Value: ₹1,00,000
• Amount Paid by User (Margin): ₹25,000
• Amount Funded by Groww: ₹75,000
  Haircut (HC): 25%

Case 1: When the Stock Value Drops:

You purchased stocks worth ₹1,00,000, where:

• Your Contribution: ₹25,000
• Groww’s Funding: ₹75,000

Now, if the stock price drops by 20%, the new LTP (Last Traded Price) becomes ₹800, reducing the total stock value to ₹80,000.

After the price drop:

• Your Contribution (25% of ₹80,000): ₹20,000
• Groww’s Funding (75% of ₹80,000): ₹60,000

Groww initially funded ₹75,000, but based on the new stock value, they should only be funding ₹60,000. This creates a margin shortfall of ₹15,000 (₹75,000 - ₹60,000).

So, you’ll need to add ₹15,000 to your margin account to cover this shortfall. 

To make the Margin Shortfall calculation more easier, you can use the below formula:

Here’s what each term entails:

• PHV (Post Haircut Value): This is the adjusted value of stocks after applying a "haircut."
• Formula: PHV = Quantity × Last Traded Price (LTP) × (1 - Haircut %).
• Example: If a stock's price is ₹100 and the haircut is 20%, ₹80 of its value is counted as collateral.
• LTP (Last Traded Price): The price at which the stock was last bought or sold in the market.
• HC (Haircut): A percentage reduction applied to a stock’s value to account for risk. Higher-risk stocks may have higher haircuts.
• MTM Collected (Mark-to-Market Collected): If the stock price falls, Groww may deduct some amount from your wallet to cover potential losses.
• Buy Value: The total amount you paid to purchase the stock.
• CC Collected (Cash Collateral Collected): The portion of your available balance that Groww considers as margin coverage.

Note: You can refer to the MTF Fund tracker (MTF Summary) to track the Amount Paid by you, the Amount funded by Groww, and the total interest deducted at the scrip level.

Let’s calculate the PHV (Post Haircut Value)

• PHV = LTP x Qty x (1-HC)
• PHV = 800 * 100 * (1-0.25)
• PHV = 60,000

a) Stocks Balance has Funds for MTM Loss

• MTM Collected: ₹20,000
• Shortfall: ₹60,000 + ₹20,000 - ₹75,000 = ₹80,000 - ₹75,000 = ₹5,000 which is more than zero. Hence No Shortfall)

b) Stocks Balance Has Insufficient Funds

• MTM Collected: ₹0
• Shortfall: ₹60,000 + ₹0 - ₹75,000 = ₹60,000 - ₹75,000 = -₹15,000 (Margin Shortfall)

Case 2: When the Stock’s haircut increases

Haircut increases from 25% to 35%

Additional Cash Collateral required will be: ₹35,000 - ₹25,000 = ₹10,000

Step 1: Calculate PHV (Post Haircut Value)

PHV = LTP x Qty x (1-HC)

PHV = 1,000 * 100 * (1-0.35)

PHV = 65,000

a) Stocks Balance has Funds for additional cash collateral

• MTM Collected: ₹10,000
• Shortfall: ₹65,000 + ₹10,000 - ₹75,000 = ₹75,000 - ₹75,000 = ₹0 (No Shortfall)

b) Stocks Balance Has Insufficient Funds

• MTM Collected: ₹0
• Shortfall: ₹65,000 + ₹0 - ₹75,000 = ₹65,000 - ₹75,000 = -₹10,000 (Margin Shortfall)

Case 3: When the Stock’s Haircut Increases & Stock Value Drops:

• Haircut increases from 25% to 35%
• Additional Cash Collateral required will be: ₹35,000 - ₹25,000 = ₹10,000
• Share Price Drops to ₹800 (20% decrease): New LTP = ₹800
• MTM Loss: ₹1,00,000 - ₹80,000 = ₹20,000

Step 2: Calculate PHV (Post Haircut Value)

• PHV = LTP x Qty x (1-HC)
• PHV = 800 * 100 * (1-0.35)
• PHV = 52,000

MTM Collected = Additional Cash Collateral required + MTM Loss

= ₹10,000 +  ₹20,000

= ₹30,000

a) Stocks Balance has Funds for MTM Loss and Increase in Haircut

• MTM Collected: ₹30,000
• Shortfall: ₹52,000 + ₹30,000 - ₹75,000 = ₹82,000 - ₹75,000 = ₹7,000 (No Shortfall)

b) Stocks Balance Has Insufficient Funds

• MTM Collected: ₹0
• Shortfall: ₹52,000 + ₹0 - ₹75,000 = ₹52,000 - ₹75,000 = -₹17,000 (Margin Shortfall)

Consequences of Margin Shortfall

If you do not cover a margin shortfall in time, you could face the following issues:

• Forced Liquidation: If the shortfall persists for 5 straight trading days, your broker may sell off a portion of your holdings on the 6th day to recover the deficit.
• Increased Losses: If market prices continue to fall, you could then not only lose your initial investment but also the borrowed amount.
• Ongoing Deficit: The shortfall is based on the previous day’s closing price. If prices drop further, the shortfall further increases, and the 5-day period will not reset. Hence, it is recommended to ensure that you have a buffer amount in your account.

Key Takeaway for Users:

1. MTM Collection: Your broker attempts to collect MTM from your stock balance to offset market losses & any additional cash collateral required.
2. Insufficient Stocks Balance: If your stocks balance has insufficient funds, your broker cannot collect the MTM, increasing the likelihood of a margin shortfall.
3. Impact: The margin shortfall amount must be deposited to maintain your position and prevent forced liquidation of your holdings.

How to Avoid a Margin Shortfall?

Preventing a margin shortfall is always better than managing it later. Follow these tips to stay prepared:

1. Monitor Your Portfolio Regularly: Check your investments to ensure your margin requirements are met. Consider placing stop-loss orders to ensure that you exit before the margin level is breached
2. Maintain a Buffer: Ensure that you have additional funds in your account over and above the set minimum margin requirement.
3. Understand The Risks of MTF: Holding MTF positions overnight can increase the risk of margin shortfall as the margin requirement can change overnight
4. Track Margin Requirements: Stay informed about any changes to margin rules and keep an eye out on your margin utilisation percentage to avoid over exposure.

Common Causes of Margin Shortfall

A margin shortfall happens when the available margin is less than the margin required for trades. Let’s break down why this can occur:

1. Market Volatility

Big price swings in the stock market could lead to a sharp decline in stock prices, bringing down your stocks' Post Haircut Value (PHV). For example, if you had invested in a particular stock and it drops by 15% in a day, the value of your portfolio drops, which could create a shortfall.

2. Changes in Collateral Value

Brokers may adjust the haircut (HC) during volatile markets. If the haircut on a stock increases from 20% to 30%, the portion of the stock value that contributes to your margin (PHV) decreases. This reduces your available margin, even if the stock price stays the same.

3. Mark-to-Market (MTM) Losses

Daily MTM losses reduce the collected collateral (CC) in your account, affecting your available margin. If the market goes down over several trading days, your account balance may not meet the required margin.

4. Higher Margin Requirements

Brokers may increase the margin requirement during periods of high market volatility. This means you’ll need more margin, and if your available margin doesn’t meet this, a shortfall occurs.

5. Over-Leveraging

Borrowing more than you can manage (excessive leverage) reduces your flexibility. If stock prices fall, your PHV and collected collateral may not be enough to cover the required margin.

6. Interest on Borrowed Money

Interest on the money borrowed through MTF is deducted from your account. Over time, this reduces your available margin and can lead to a shortfall if not monitored.

8. Missed Payments & Non-compliance with Peak Margin Rules

If you don’t top up funds when required, the available margin may fall short of what’s needed, leading to a shortfall.

Conclusion 

Margin shortfalls is a common risk in Margin Trading Facility (MTF). However, it can be controlled with the help of proactive measures. Monitoring your margin regularly, understanding market risks, and ensuring that adequate collateral is maintained are some of the key aspects to consider when trying to avoid margin shortfalls.

With discipline and access to the right information, traders can successfully leverage MTF while limiting losses. Before opting for MTF, assess your risk appetite, trading strategy and capital allocation. Consulting experts and exploring the right resources can aid you in making informed decisions and optimise your MTF experience.

Disclaimer: This content is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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