This guide explains how a margin pledge works, haircuts, the rule that half of the margin must be in cash, what pledged collateral can and cannot pay for, the costs and the risks.
How a margin pledge works
Since September 2020, shares used for margin stay in your own demat account under a pledge. The steps are:
- You request a pledge for selected shares in your broker's app or website.
- You authorise it with the depository, CDSL or NSDL, usually by OTP.
- The broker re-pledges the shares to the clearing corporation.
- Collateral margin appears in your account, usually the same day if you pledge before the broker's cut-off.
To release the shares, you request an unpledge. The collateral is removed from your margin once the request is processed, and the shares are free to sell.
Which securities can be pledged
Clearing corporations publish lists of approved securities. They usually include:
- liquid shares, such as most large and mid-sized companies,
- exchange-traded funds, including index and gold ETFs,
- many mutual fund units,
- government securities and treasury bills.
Brokers may accept fewer securities than the clearing corporation lists.
Haircuts
The clearing corporation counts pledged securities at less than their market value. The reduction is the haircut, set from the security's volatility and liquidity and revised regularly.
| Security type | Typical haircut |
|---|---|
| Government securities, treasury bills | Small |
| Liquid ETFs and index ETFs | Low |
| Large, liquid shares | Moderate |
| Smaller or more volatile shares | High |
Haircuts change with market conditions. Check the current figure for each security with your broker.
The 50% cash rule
Clearing corporations require that at least half of the margin for F&O positions comes from cash or cash equivalents. Pledged shares can cover the other half.
Cash equivalents include certain liquid funds, liquid ETFs, government securities and treasury bills, after their own haircuts. Many traders hold part of their capital in a liquid ETF so that it counts toward the cash half while earning a return.
If your cash falls below half of the margin used, brokers usually charge interest on the shortfall.
What collateral cannot do
- It cannot pay losses. Daily mark-to-market losses on futures, and premiums for options you buy, must be paid in cash. A loss reduces your cash, and the shortfall against the 50% rule can grow quickly.
- It cannot pay option premiums. Buying options needs cash.
- It shrinks when prices fall. If the shares fall, the collateral value falls with them, often when your positions are losing too.
The risks
- Forced sale. If your margin runs short and you do not add funds, the broker can sell pledged shares to cover it.
- Double exposure. Pledging shares to sell options adds leverage to a portfolio that is already exposed to the market. A fall in the market can hit both at once.
- Haircut increases. In volatile markets, clearing corporations can raise haircuts, reducing your collateral overnight.
What you keep
Pledged shares stay in your demat account in your name. You remain the owner and receive dividends, bonus shares and other corporate benefits. You cannot sell the shares until you unpledge them.
Costs
Brokers and depositories charge a small fee for each pledge and unpledge request, usually per security. Interest on a cash shortfall is the larger cost if you rely heavily on collateral. Check your broker's charges.
Pledging and hedged strategies
Hedged option strategies, such as spreads and iron condors, need less margin than naked short options. Combining a hedge margin benefit with pledged collateral lets you trade within your margin without selling long-term holdings. Size positions by the maximum loss, not by the margin available. See options risk management.
Using collateral with QuantPower
QuantPower places orders through your broker account, so the margin available there, including collateral from pledged securities, is what your strategies can use. Margin and collateral are managed by your broker; check the margin required before you deploy a strategy. See broker connection requirements and the F&O margin calculator.
Frequently asked questions
Can I use pledged shares for option buying?
No. Buying options needs cash for the premium. Pledged collateral covers margin for futures and option selling.
Do I get dividends on pledged shares?
Yes. The shares remain in your demat account and you receive dividends and other corporate benefits.
How long does it take to pledge shares?
Usually the same day if you authorise the request before your broker's cut-off. Check the timing with your broker.
What happens if my pledged shares fall in value?
Your collateral value falls. If your margin becomes insufficient, you must add funds or reduce positions, or the broker can close positions or sell pledged shares.
Why can't I use all my collateral?
Because at least half of the margin must be in cash or cash equivalents. Collateral can only cover the other half.
Sources
- SEBI circular on margin obligations to be given by way of pledge or re-pledge in the depository system, February 2020 (in force from 1 September 2020)
- NSE Clearing, list of approved securities and applicable haircuts
- NSE Clearing and other clearing corporations, collateral requirements for the cash component of margin