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Sebi recently aligned margin processes for derivative and cash markets, with the objective of reducing risks in the system. Actually, the markets regulator has come up with many additional rules and mechanisms recently to reduce the risks of misuse of funds and securities, and to safeguard retail investors.
Sebi has now restricted stockbrokers from providing additional leverage for intraday trades. With the change in the rule, investors now need to deposit 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 at the time of placing an order.
Meanwhile, a request has been placed with Sebi to segregate between intraday margin and positional margin. Stockbrokers have written to Sebi to allow them to collect margins from their clients after market closing, instead of collecting them upfront at the time of doing the trade. Earlier, margin funding allowed brokerages to keep the unpaid securities in their own account, and in turn, pledge them to NBFCs to raise funds.
If data is to be believed, intra-day trading volumes comprise at least 50 per cent of most stockbrokers’ daily activity. As the new rule prevents brokerages from offering margin funding, it could adversely impact trading volumes on stock exchanges. The new rule will allow only bigger traders to take bigger positions, as they can afford it, and hence revenues of smaller brokerages are going to get hit. It would lead to an increase in the impact cost or slippages. Besides, participation in the weekly options is going to get limited as traders may be forced to move to monthly options in stocks and indices.
Many small stockbrokers will need to limit their business, as they will have to pay a penalty if the initial margins have not been paid for trades carried forward to the next day.
However, in the long run, it is expected to help retail traders adopt a disciplined approach and indirectly control speculative activities in the market. Moreover, a sufficiently leveraged system and positions will positively make trading more transparent and increase market participation in a more continuous manner.
Chairman and MD, SMC Investments and Advisors
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