The new margin pledge rules that kicked in from September 1 after Sebi refused to extend the deadline will not materially alter the life of investors but will be a challenge for brokers.
The new rules are aimed at bringing transparency and preventing brokerages from misusing clients' securities. The Securities and Exchange Board of India (Sebi) came out with the norms in February and these were to come into effect from June 1 but the deadline was pushed to August 1 and then to September 1.
The new rule will help to control the misuse of the funds and securities of the investors. The change in margin system and pledging and repledging of securities can undoubtedly bring disruptions in volumes of daily trading, say brokers.
Earlier, a client would give power of attorney (PoA) to the broker to use existing client holdings to access margin for derivative trades.
This led to brokers pooling securities across clients, with a client's holdings indirectly being used to provide margin to another client, who had a shortage of collateral.
“Under the new system, this system is now segregated with no PoA or pooled accounts, and individual liens on a client's holdings. This means that the client can be sure that his/her holdings are being used as collateral only for her margin needs and not someone else's,” Siddharth Panjwani, Chief Strategy Officer, Pickright Technologies told Moneycontrol.
“This is a supply-side shock when it comes to collateral - reducing speculator's supply of indirect collateral from a broker. In that sense, volumes would drop to the extent of pledges available in each client's accounts. Besides, margin would also be needed in the cash segment which was not the case earlier,” he said.
Deepak Jasani, Head of Retail Research, HDFC Securities explains the flow of trade:
For instance, you buy Pidilite shares worth Rs 100. Earlier the entire Rs 100 would be debited on the subsequent day (T+1) to enable brokers to pay-in on T+2, now Rs 20 will be debited the same day.
If you sell Pidilite shares worth Rs 100, either you deposit a cash margin of 20 percent of the value in advance or transfer the entire securities in advance to the broker on the same day from your demat account, instead on the next day.
Additional and MTM margins are also payable as required on T+1 day, however, as the balance pay-in normally happens on that day, this requirement may not have a large impact.
Siddharth Panjwani, Chief Strategy Officer, Pickright Technologies explains the process of pledging of shares:
Under the new process, the client can choose which specific securities she wants to pledge or use as collateral for margin.
Once that choice is made on the broker's website, an SMS would be received on the client's registered mobile number from CDSL/ NSDL acknowledging the chosen securities and quantities and an OTP would have to be generated.
Once the OTP is entered, it is authenticated and the securities are approved for the pledging / re-pledging process on to Trading Member and Clearing Member.
Volumes can take a hit
Investors will not see a major change except that paying for shares and funds will happen a day earlier, but brokers with outdated systems could feel the pinch. To that extent, there can be a loss on interest on the sums are paid out a day in advance.
“Many brokerages are facing issues to adopt new changes. We are ready with the new pledge/un-pledge framework and to route them through the new pledge system,” Tejas Khoday, Co-Founder and CEO, FYERS told Moneycontrol.
“The change in margin system and securities pledge-repledging could undoubtedly bring disruptions in volumes of daily trading,” he said.
Deepak Jasani of HDFC Securities said traders could feel a greater impact as the leverage ratio that they have been enjoying in the cash market for intraday trades will reduce sharply and the procedure for offering shares as collateral for getting limits to trade becomes a little more complicated.
“Some brokers are still not fully prepared due to their legacy IT systems, their business structure or their risk management and operations software which requires extensive changes in times when IT support from vendors may not be fully available in time,” he said.
Disclaimer: The views and investment tips expressed by 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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