Peak margin: BSE brokers write to SEBI on practical difficulties

Our Bureau Mumbai | Updated on November 20, 2020 Published on November 17, 2020

New norms to kick in from December 1

The BSE Brokers Forum, in a note to market regulator SEBI, has highlighted the practical difficulties with the new ‘peak margin’ collection and reporting system. It has told SEBI that the current system where clearing corporations (CCs) send daily client margin files with peak margin, despite the fact that positions have been squared off during intra-day trades, is creating difficulties for brokers.

Last week, the Association of National Stock Exchange Members of India (ANMI), too, had opposed the peak margin system and highlighted how the draconian regime is only being put to practice in India and is found nowhere else in the global markets. However, the BSE Brokers Forum has only sought that SEBI address the practical issues.

Equity market brokers are expressing their reservations with regard to the system of ‘peak margin’ collection. New norms for stock traders in the derivative segments will be introduced from December 1. This is after upfront margin collection norms were introduced in the cash market segment by the Securities and Exchange Board of India in October.

Peak margin is the collection or reporting of client margin by stock brokers during the day based on the peak theory. The clearing arms of stock exchanges send four snapshots of broker- and client-wise trading positions based on which highest margin has to be considered for payment. The issue here is that such a practice is resulting in chaos as it so happens that several clients square-up their entire position before the market closes but are yet subject to ‘peak’ margins, brokers say.

“In cash segment, when a client sells securities and early pay-in is made at the end of day (EoD), the margin becomes nil but the files being received from clearing corporations continue showing the peak margin obligations. The non-collection may lead to penalties. When the client trades across different segments at different points of time within the available margin, each segment tends to show a different peak margin. Reporting in such a scenario becomes difficult,” the BSE Brokers Forum said in its letter.

A solution to these issues is either to update the calculation methodology of the CCs or to issue specific peak margin reporting norms for such real-life situations, the forum has suggested to SEBI.

ANMI has told SEBI that the concept of peak margin does not exist globally. A EY report commissioned by ANMI shows the concept is unique to India.

SEBI introduced the margin norms especially after Karvy’s use of client shares for loan purposes alarmed the regulator.

ANMI’s grievances

“To now introduce peak margins and tinker with the business model of the stock brokers is an infringement on their ability to conduct their business smoothly and profitability, thereby endangering the very economics of their businesses. We fail to comprehend the reason behind introducing the same when the concept of EoD margins exists since the past 20 years and is now well- settled within the framework. All along, exchange members earlier used to report the margin collection at broker level and subsequently at client level which, has adequately safeguarded the markets from settlement defaults since past so many years,” ANMI letter said.

According to ANMI, when there exist adequate measures to prevent the “Peter Paul” apprehension, it would be futile to stranglehold the market through such measures and could be well-avoided.

ANMI has told SEBI that the apprehension of misuse of client’s securities was mitigated by the introduction of a pledge system, whereby the final trail of use of client’s securities audit trail is available for the exchanges and their arms and SEBI.

‘No chance of misuse’

With the introduction of client-level margining as against pool margining in the past, no stockbroker can misuse one client’s securities for allowing exposure for another client. In fact, the current margining system of the CCs initially temporarily blocks brokers’ capital for a few minutes and then releases the same if there is a corresponding pledge found in the UCC of the client; else the capital of the broker continues to be blocked.

Under this mechanism, there cannot be any scope of misuse of one client’s securities for another, which was the primary source of concern and apprehension of SEBI, ANMI has said.

According to ANMI, any exposure given to clients by brokers whose shares are not pledged, result in consuming the brokers’ own capital. The proposed peak margins norms has ignored this stark reality and seems to be based on the unfounded apprehension that intra-day extra leverage is going to result out of other clients securities which is not the case at present.

The clearing corporations demarcate the eligible collateral quantity for each client in line with their member and market-wide limits, further giving credence to our submissions that even at client level, any additional collateral which is not considered also eats up the capital of the broker, ANMI has highlighted in its letter.

No intra-day leverage

As per ANMI’s rough estimates, nearly 90 per cent trading volumes on Indian exchanges is intra-day and by indirectly not allowing brokers to provide intra-day leverage to their clients from their own capital through the mechanism of peak margin is unjust and contrary to the current beliefs about misuse of client securities, especially after recent amendments in regulations and steps taken by SEBI to control the unscrupulous practices of misuse of clients collaterals

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Published on November 17, 2020
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