SEBI to retain cash market margin rules, NRIs may get relief after Jan 8 meet

In its November circular, SEBI said it was aligning margin processes for the derivative and cash market segments.

Representatives of broker associations will be meeting SEBI officials on January 8, seeking dilution of the margin norms for cash market trades.

Stockbrokers are pushing for a change in the rules that allow them to collect margins from their clients after market closing, instead of collecting them upfront at the time of doing the trade, as SEBI rules currently require.

The source said that SEBI had come across instances where many clients were doing big trades intra-day, which posed a risk to the system if their brokers had not collected adequate margins.

The SEBI decision to bring margin rules for cash and derivatives segments on par follows instances of many brokers using the collateral of one client to pay for the margin requirement of other clients.

In the cash market, there were no clearly defined rules for collection of margins, until SEBI issued a circular in November last year.

The value at risk (VaR) margin was collected by the Clearing Corporation upfront from brokers by adjusting against the available liquid assets of the brokers at the time of the trade. As part of the networth requirements, brokers have to maintain a certain level of funds with the Clearing Corporation at all times.

However, the quantum, form and mode of collection of the margin from the client was left to the discretion of the broker.

This is in stark contrast to the derivatives segment, where clients are required to shell out the various margins at the time of placing their order.

“The absence of a defined margin system for cash market trades posed a huge risk to the system,” said the top official at an institutional broking firm. “Brokers were allowing their clients 20-30 times leverage,” the official added.

This meant that by depositing Rs 10,000 with the broker, a client could take up a position worth Rs 20-30 lakh in the cash market.

Brokers will now have to collect the value at risk margin (VaR), extreme loss margin, (ELM), mark-to-market margin (MTM), delivery margin, special/additional margin or any other margin as prescribed by the stock exchanges, from their cash market clients, at the time of the order.

The VaR margin is a margin intended to cover the largest loss that can be encountered on 99 percent of the days (99 percent Value at Risk). For liquid stocks, the margin covers one-day losses while for illiquid stocks, it covers three-day losses so as to allow the exchange to liquidate the position over three days.

The ELM for any stock is the higher of 5 percent, and 1.5 times the standard deviation of daily logarithmic returns of the stock price in the last six months. This computation is done at the end of each month by taking the price data on a rolling basis for the past six months and the resulting value is applicable for the next month.

Said the Chief Executive Officer of a retail broking firm: “Brokers who not have a depository participant (DP) facility will be affected; those who have Demat and DP facility will not be affected by this circular. The impact of this circular may be limited as less than 20 percent of the brokers in the market will be affected. However, one circular after the other is hurting the broking community.”

Another Delhi-based broker who deals mainly with retail investors told Moneycontrol: “This circular will only affect retail traders, not a retail investor. Retail investors mostly have a pre-decided limit and transfer money upfront. Retail traders will henceforth have to put up margins before taking up positions and that in a way is good for the system. If one big clients defaults and the broker tries to fund that loss by using the shares and funds of other clients, it is bad for the industry as a whole.”