SEBI postpones new margin rules to December 1
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Following representations from the broking community, markets regulator Sebi on Monday postponed the implementation of the enhanced margin requirements for trading in the stock market, aimed at making the market safer for investors, by three months to December 1.
Among several rules brought in by Sebi, it asked traders and investors to pay intra-day margin, while the current system is of end-of-the-day margin. Sebi also introduced the concept of peak margin reporting, which requires the clearing corporation (usually an arm of the stock exchange) to inform traders and investors at least four times a day about their margin requirements. The current system does not require such updates.
Margins are stocks, money or some other form of liquid assets that traders and investors deposit with exchanges, which act as a form of security for their financial exposure in the market. Margins are calculated as a percentage of a trader’s total exposure in the market, which rises and falls with the prices in the market. For example, a 20% margin requirement means by depositing Rs 20 lakh with the broker, the trader’s total market exposure could be up to Rs 1 crore.
At present, often brokers, especially the smaller ones, use the margins deposited by one client for another. After the Karvy Stock Broking scam in August 2019, Sebi wanted to put in strict checks and balances to stop this practice of inter-client margining system within the same brokerage house. However, brokers said the collateral damage of the new rules may be that even large brokers will be barred from financing margins for their clients.
Brokers said the new margin guidelines may spell the death knell for intra-day trading, that constitute about 90% of the volumes in the market. Through a note titled “The Death of Intra-day Trading”, Samco Group founder & CEO Jimeet Modi said that since the margin penalty will be based on higher of peak margins reported during the day, based on snapshot files or end-of-the-day margin, this practically means “no more intra-day leverage”.
Speaking about the implications of the Sebi circular, Modi said brokers won’t be able to offer intra-day margins beyond VAR+ELM (Value at risk and extreme loss margin). “Our estimate is that almost 30-35% of the intra-day turnover is based on additional leverage provided by brokers. Now assuming full margin is required, total turnover would shrink by approximately 20%,” the note pointed out. “Clients will need to maintain a lot more margins for initiating intra-day trades (and) return on investment on intra-day trading will fall substantially.” #casansaar (Source - SEBI, TNN, Times of India)
Among several rules brought in by Sebi, it asked traders and investors to pay intra-day margin, while the current system is of end-of-the-day margin. Sebi also introduced the concept of peak margin reporting, which requires the clearing corporation (usually an arm of the stock exchange) to inform traders and investors at least four times a day about their margin requirements. The current system does not require such updates.
Margins are stocks, money or some other form of liquid assets that traders and investors deposit with exchanges, which act as a form of security for their financial exposure in the market. Margins are calculated as a percentage of a trader’s total exposure in the market, which rises and falls with the prices in the market. For example, a 20% margin requirement means by depositing Rs 20 lakh with the broker, the trader’s total market exposure could be up to Rs 1 crore.
At present, often brokers, especially the smaller ones, use the margins deposited by one client for another. After the Karvy Stock Broking scam in August 2019, Sebi wanted to put in strict checks and balances to stop this practice of inter-client margining system within the same brokerage house. However, brokers said the collateral damage of the new rules may be that even large brokers will be barred from financing margins for their clients.
Brokers said the new margin guidelines may spell the death knell for intra-day trading, that constitute about 90% of the volumes in the market. Through a note titled “The Death of Intra-day Trading”, Samco Group founder & CEO Jimeet Modi said that since the margin penalty will be based on higher of peak margins reported during the day, based on snapshot files or end-of-the-day margin, this practically means “no more intra-day leverage”.
Speaking about the implications of the Sebi circular, Modi said brokers won’t be able to offer intra-day margins beyond VAR+ELM (Value at risk and extreme loss margin). “Our estimate is that almost 30-35% of the intra-day turnover is based on additional leverage provided by brokers. Now assuming full margin is required, total turnover would shrink by approximately 20%,” the note pointed out. “Clients will need to maintain a lot more margins for initiating intra-day trades (and) return on investment on intra-day trading will fall substantially.” #casansaar (Source - SEBI, TNN, Times of India)
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