A SEBI-appointed Secondary Market Advisory Committee (SMAC) may approve two important proposals next week—a new margining system and a mechanism for pledging equity shares.
"Brokers now have a consensus on margin requirements, an issue where there were differences earlier,” a source familiar with the matter told Moneycontrol.
“The risk management committee may approve the new margin structure, which is likely to be on par with those followed by stock exchanges in developed markets. After that, the SMAC will have to approve it,” the source said.
The SEBI-appointed Risk Management Review Committee (RMRC) in October had agreed on most recommendations of the sub-working group. This group had proposed lower margins for hedged positions and status-quo on unhedged derivative positions.
So if the positions are unhedged, the current margin rule will apply.
The new rules will reduce margin requirement considerably for hedged positions will For instance, in a Nifty call spread, assuming one buys a Nifty call of 11,500 and sells a Nifty call of 11,600 then margins based under the current structure would work out to Rs 80,000. Under the new structure, the margin will be only Rs 5,000.
The steep reduction in margins, while adhering to risk management rules, will benefit market participants immensely. That is because lower margins will enhance returns for the traders as the amount of working capital blocked will reduce significantly. The move will also enable traders do transact more, which in turn could boost liquidity and reduce impact cost.
Says the report by the Risk Management Review Committee:
“India is the only country in the world where initial margin charged in the F&O (Futures and Options) segment consists of three layers- SPAN (Standardised Portfolio Analysis for Risk), exposure and additional margin. The study also found that if India followed only SPAN margin system it would have been good enough to cover the risk for 99.44 percent instances of At-the-Money (ATM) and Out-of-the-Money (OTM) stock option contracts. Simply put, there is no need to burden traders with extra margins”.
The report further says, "Higher margins result in a lower return on investment (RoI) for a trader. Ironically, an FII who has an option of trading both in India as well as in Singapore Stock Exchange (SGX) would pay higher margin money in India and only the SPAN margin in Singapore. Essentially the same amount of money will give the FII better leverage and higher return if he trades abroad".
Another major issue which could be discussed is that of pledging mechanism of shares. Under the new mechanism, the clearing corporation will know the owner of the shares that are being pledged.
“Through this process, the exchange will know whose assets are with the clearing corporations and brokers will not be able to pledge them in their own name," the source said.
Another point of discussion could be using a similar procedure for retail investors as is being followed for Foreign Portfolio Investors or Non Resident Indians. In this process, brokers keep the assets of their clients with custodians and only after confirmation of trade would release them to clearing corporations. Such a mechanism could apply to HNIs and retail investors.
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