India’s stock broking community is up in arms in the wake of new regulations that mandate reporting of collateral, against which trading limits are given, at the level of each client.
From the beginning of August, stock brokers have been saddled with huge penalties by the clearing corporations (CCs) of stock exchanges for reporting a shortfall in collection of client collateral. Brokers on their part, told BusinessLine that the penalty regime has begun on a turbulent note since systems of CCs were not functioning smoothly and the procedures were marred with glitches and repetitions. This is also taking a toll on trading volumes in the market since clients are being told to bring extra margin over and above the regulatory requirement to salvage the potential crisis that occurs on a real-time basis daily, brokers say.
‘Wiping out brokers’
On August 5, the Association of National Exchange Members of India (ANMI), wrote to market regulator SEBI, the National Stock Exchange (NSE) and its CC, explaining the hiccups, infrastructure bottlenecks at the CC-level and also sought a waiver from penalties imposed on brokers. ANMI has again sent forms to brokers seeking a list of issues faced by them in reporting the segregated collateral at the client level and difficulties in uploading the files at least four times a day due to tech and infra-related issues from the CC-end. ANMI has informed the brokers that it would be sending fresh letters to SEBI and NSE along with all the complaints from brokers, sources said.
“The new regime will wipe out the broking community and lead to monopoly in the hands of a few big brokers, who are all playing the discount game for now,” said a New Delhi-based broker, who has been filling ANMI forms.
Thousands of crore worth of collateral management takes place in the stock markets on a daily basis since upfront margin requirement is now necessary for each client. Any failure to report this almost on a real-time basis during market hours is attracting penalties, brokers said. Earlier retail players could trade and invest in cash and derivatives first and pay later, when the margin or the total amount was due, since their brokers took care of the initial collateral required for the trade settlement.
Glitches and confusion
Brokers also have to report dis-aggregated information (segment-wise and asset type-wise break-up) of each client’s collateral files that are sent by the CCs, indicating the collateral required. But brokers say in some of the cases, the files being sent during the day by the CC have different figures mentioned. For instance, the file which came in the morning could have a collateral requirement of ₹1 lakh from the client, which could suddenly become ₹3 lakh a matter of few hours. Now, the brokers have to ask their clients to keep bringing additional collateral, and in case of a shortfall, the brokers are penalised.
At the start of August, N-MASS, the portal provided by NSE for brokers to upload files, and MG13 (the margin file) were showing different figures leading to confusion.
Margin requirements for trading in India are among the toughest in the world and touch the six sigma level, brokers say. Brokers and clearing members, who settle the trades, are required to maintain at least 50 per cent of the total collateral in the form of cash or cash equivalents at each client level, while the rest can be other securities.
Some of the issues faced by brokers in margin reporting include tech glitches in uploading files into system; no such facility provided by commodity exchanges; not getting margin files on time from the CC; not getting allocated response to the file immediately; request rejected due to higher margin utilisation and insufficient allocation amount; technical error due to client-credited balance are not considered; and delays in file response and data mismatch in N-MASS.No live physical seminars, too, were conducted by the NSE CC on the new regime, they added.