MC EXCLUSIVE Cash segment margin likely to reduce, SEBI panel endorses margin rationalisation proposal

Cash Segment margin likely to reduce, SEBI panel clears the margin rationalisation proposal 

• SEBI panel backs reducing margins on cash transactions, final decision pending
• Panel suggests margins not fall below 12.5 percent to manage market risk
• SEBI aims to boost cash market volumes and considers other reforms

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With a move to encourage cash transactions in the market, Securities and Exchange Board of India’s (SEBIs) panel has given a go ahead for reducing margin on cash transactions. As per sources aware of the development, the issue is now with the SEBI to take a final view. As per one source, “Panel agreed with the proposal to rationalise the cash segment margins and gave its consent to review the existing system." At the same time, the panel also advised that fair amount of margin should be collected to ensure the risk is well covered.

However, panel advised that it should not go below 12.5 percent, rest the SEBI will have to decide. Currently the Value at Risk (VaR) and Extreme Loss Margin (ELM) of most of the stocks is in the range of 12.5 to 20 percent. VaR margin is collected to cover the maximum possible loss over a period of time due to volatility in market. Similarly, ELM or Extreme Loss Margin is additional margin charged by exchanges beyond normal margin requirements.

A second source said, “SEBI will have to do more back testing of data and then take a final view after consultation with the clearing corporations, exchanges and other stakeholders”. Margins are collected to fund the part of the trade like an advance in the normal course of purchase transactions. It is to reduce the risk in the system in case the client fails to pay or provide the shares sold, leading to default in the case of an adverse market event.

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The regulator’s focus is on boosting volumes in the cash segment. While trading volumes in the cash segment have doubled over the past three years, they remain highly disproportionate when compared with volumes in the equity derivatives segment. SEBI Chairman on several occasions has emphasized the need to deepen the cash market segment.

As per SEBI data the average daily turnover in cash market was Rs 39,148 crore in FY20 and increased to Rs 66,007 crore in FY21, in FY22 the numbers further increased to Rs 72,368 crore, FY23 saw a small dip and number was Rs 57,666 crore, in FY 24 the number jumped to Rs 87,978 crore and by FY25 the number further jumped to Rs 1,20,782 crore. The number is expected to go further in current financial year.

SEBI has received a broad set of suggestions aimed at deepening trading volumes in the equity cash market. Sources say the proposals include strengthening the stock lending and borrowing framework, boosting participation in Exchange Traded Funds (ETFs), cutting or scrapping Securities Transaction Tax (STT) on intraday cash market trades, and easing margin requirements in the cash segment. SEBI has already started discussing on ways to make SLBM popular and a working group is examining the issue.

An email seeking comments from SEBI on the issue remain unanswered.

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