The National Stock Exchange (NSE) has issued a circular on Thursday, extending the deadline for the imposition of penalty on brokers for not collecting adequate margins by 15 days – from September 1, 2020, to September 15.
“It has been decided to not levy penalty for client margin short/non- collection and reporting in the Cash and Derivatives segments. This provision shall be applicable for a period of 15 days -- from September 1, 2020 to September 15, 2020 -- to facilitate a smooth transition for members to the new system,” the circular said.
The NSE has issued the circular after consulting the Securities and Exchange Board of India (SEBI).
The new framework of acceptance of securities as margin by way of pledge/re-pledge mechanism through the depository system from September 1, 2020, has resulted in a system congestion due to a large number of client securities being pledged in TMs/CMs/CCs systems, the circular said.
TMs, CMs, and CCs refer to trading members, clearing members and clearing corporations.
“This has restricted the ability of the members to comply with the requirements of collection of margins,” the circular said.
The implementation of the margin pledge-repledge system, along with the penalty for non-collection of margin in the cash segment, has led to an unprecedented load on the system of the Depositories and Clearing Corporations, leading to their virtual collapse.
The entire pay-in, pay-out system of the National Securities Clearing Corporation Ltd, a wholly owned subsidiary of NSE, and placing and release of collateral have been significantly affected, leading to practical problems at broker offices.
The problems relate to not being able to grant limits on time, inability to effect an early pay-in, auction of securities and the like.
“Back offices of all brokers are at their wits’ end due to the collapse of the market infrastructure. What is happening?” said a senior official of a Mumbai-based stock broking firm.
What is margin pledging?
Pledging refers to using stocks as securities to avail a loan. Traders in the F&O segment use pledging to receive margin funding from the broker to invest in deals that involve sizeable initial investment.
Margin allows investors to leverage, invest in deals without assuming the full risk at the first stage. When you pledge, your risk exposure gets limited to the securities you have used as collateral. In case you can’t repay the margin, the broker liquidates the stocks in the margin account to recover the debt.
The broker is the custodian for securities or funds in the margin account. However, on certain occasions, violation of margin collateral was reported to SEBI. Some brokers were found guilty of misusing client funds and collaterals. The new margin pledge policy will help to address this problem.
What is margin pledging system?
Under the earlier system, investors were not required to pay upfront margin in the cash segment as cash margins were looked after by the broker. From September 1, a new system was introduced.
Under the new system, brokers will have to collect margin from investors upfront for both buying and selling of securities. Failing to do so will attract a penalty. The securities in the demat account will not automatically become available to receive margins. The broker also has to report to the exchange the margins collected from investors.
Under the new system, depositories should provide margin pledge for pledging clients' securities as margin to the trading member or clearing member.
To provide collateral in the form of securities as margin, a client will be required to pledge securities with the trading member. He/she will re-pledge the same to the clearing member, who, in turn, will re-pledge the same with the clearing corporation.
SEBI had, on Monday, met brokers, depositories and exchanges on to assess whether they are ready to move into the new margin pledge and re-pledge system from September 1, 2020.
While depositories claimed they were fully ready, brokers say that the backend system of more than 75 percent of them is not fully equipped. There are 1,500 brokers.