In a recent circular, the National Stock Exchange (NSE) tightened list of securities eligible as collateral for margin funding used in intraday or derivatives trading. Of the 1,730 eligible securities, NSE Clearing has removed 1,010, including notable companies such as Adani Power, YES Bank, Suzlon, Bharat Dynamics, and Paytm.
Starting August 1, the exchange said that it will accept collateral only those securities that have been traded at least 99 percent of the days over the last 6 months and have an impact cost of up to 0.1 percent for an order value of Rs 1 lakh.
Before delving deeper, let us first understand the concept of margin trading facility (MTF), why investors pledge shares as collateral to secure their margin funding, and what this new circular will effectively mean from August 1.
What is MTF?
Similar to the concept of 'buy now, pay later,' MTF allows investors to buy shares for a fraction of the total trade value. They invest a certain amount, and the broker lends the rest of the funds, charging interest on the loan. For example, if an investor wants to buy 1,000 shares of a company that trades at Rs 100 per share, the investment amount required would be Rs 1 lakh.
With MTF, the investor can pay only 30 percent of the amount, while the broker funds the remaining 70 percent with an interest rate.
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What does collateral mean?
As MTF allows investors to buy more stocks than they can afford by borrowing funds from their broker, these borrowed funds are secured against stocks purchased or other securities in the investor's account. This is like providing a security deposit that assures the broker they have some protection against the funds lent to you.
So, these pledged securities are 'collateral' that investors use to secure their margin funding. If the value of collateral decreases, investors may need to add more collateral or sell positions to maintain the required margin.
Which stocks cannot be used as collateral as per the revised circular?
It is important to note that the stocks must be verified (pledged with the broker) as per SEBI guidelines to purchase under MTF. According to the revised NSE circular, the clearing arm will accept collateral only those securities that have been traded at least 99 percent of the days in the last six months and have an impact cost of up to 0.1 percent for an order value of Rs 1 lakh. Impact cost is the cost of executing a transaction in a given stock for a specific pre-defined order size.
Earlier, around 1,730 stocks were eligible to pledged as collateral but the new list eliminates 1,010 stocks starting August 1, 2024 in a phased manner. This includes well-known companies such as Adani Power, Yes Bank, Suzlon, Hudco, Bharat Dynamics, Bharti Hexacom, IRB Infrastructure, NBCC, Go Digit, Tata Investment, Paytm, Inox Wind, Jupiter Wagons, KIOCL, Jyoti CNC Automation, JBM Auto, Hatsun Agro Product, Tejas Networks, among others.
Will the revised collateral list impact overall MTF book?
No, said Ashish Rathi, Whole-Time Director of HDFC Securities in a conversation with CNBC-TV18. Given the MTF book of stockbrokers stand over Rs 73,500 crore, the exposure taken on MTF stocks does not change but the ones that investors pledge as collateral with their brokers gets impacted in a phased manner, he added.
"After the investor pledges shares to the broker to maintain his margin requirement, the broker then pledges it to Clearing Corporation to maintain account balance. This repledging to Clearing Corporation changes, wherein they won't be accepting all securities and haircuts would be applicable," Rathi explained.
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How does NSE plan to remove unapproved collateral?
In order to provide a transitional support to the clearing members for replacing the unapproved securities, the NSE will progressively raise the haircut. The progressive increase in the haircut percentages from August 1 to November 1 will gradually phase out the use of certain securities as collateral by making them less attractive over time.
The initial haircut applied on the unapproved securities will be 40 percent or the value at risk (VAR), whichever is higher. This will increase to 60 percent from September 1, 80 percent from October 1, and 100 percent from November 1.
Finally, why this measure?
The overall aim of these changes is to ensure that only highly liquid and stable stocks are used as collateral, thereby reducing the risk for the clearinghouse and the broader financial system.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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