Stocks

Broker association seeks relaxation on proposed margin norms in cash segment

PALAK SHAH Mumbai | Updated on July 14, 2020 Published on July 14, 2020

Stock brokers’ association, ANMI, has written to market regulator SEBI seeking relaxation of its upfront margin collection norms in the cash segment before these are implemented. Brokers have also suggested that margins on small investors should be exempted for up to ₹5 lakh of the obligations, in order to mitigate the hardships on small traders and investors.

“Concerns with the impending deadline of August 1, 2020 (with regard to new margin structure) now assumes extreme importance and significance. ANMI is of the opinion that the manner in which the measures are proposed to be implemented will cause hardship to brokers and their clients,” a letter to the Securities and Exchange Board of India (SEBI) from the Association of National Exchanges Members of India (ANMI) said. The letter is titled ‘Practical Hurdles on Margin in the Cash Segment.’

Earlier this year, SEBI had proposed that an upfront margin should be collected from traders and investors even in the cash segment. This also covered the sale of shares. For instance, if an investor wanted to ‘sell’ shares, he or she had to deposit upfront margin equivalent to the sale. Brokers have said this is illogical.

“There should not be any margins on sale of shares, which is resulting in delivery by T (today) + 2 days. We have collated data from NSE to demonstrate that the auction percentage of short deliveries are only to the extent of 0.20 per cent. Investors are forced to deliver on the same day and especially in present times when there are restrictions on movement and curfew across the country. The insistence of delivery on the same day of sale is not practical when the settlement cycle itself is of T + 2 days, and investors should have the freedom to deliver within the stipulated timelines,” ANMI said.

Investors sell shares to raise money, and failure to deliver the shares on the same day or giving shares in advance to brokers resulting in a penal charge is unjust and unfair, ANMI said.

ANMI is also of the view that the timelines of ‘early pay-in’ as determined by the Clearing Corporations is 4 pm, which is totally out of place with the ground reality.

“While the CCs have not been able to give trade files before 5 pm and at times even till late evening, it is impracticable for brokers to do early pay-in (EPI) and reduce their working capital burden with such timelines,” ANMI said.

Pointing out an anomaly in the EPI system, the brokers said the EPI instruction is irreversible and locked till the T + 2 day, and therefore, the risk is absolutely zero. But still, its full benefit is not passed on to the broker and the investor.

The margins are always levied on the basis of risk on open positions. Bulk of the trading volumes on the exchanges take place with a two-day trading horizon, popularly called BTST (buy today, sell tomorrow). Traders purchase on T day and they sell the same scrip on T + 1 day, and take a fresh position in another scrip. There is no risk on T + 1 day on the positions taken on T day since it is squared off on T + 1 day.

“The impact of the current margining system on such trades results in triple margins. The first margin is on the Buy position of T day, second margin is on the Sold position of T +1 day, and the third margin is on the fresh position taken on T + 1 day. This results into a cascading effect on margins on the brokers and investors who are forced to pay solely because the Clearing Corporations have not come up with solutions to mitigate such scenarios. We have therefore, suggested that the margins should only be on net long positions on any given day which will take care of such scenarios. In the joint meeting held with SEBI, depositories, exchanges, clearing corporations and broker associations, all participants had acknowledged this problem and had assured that this will be dealt with. But no headway seems to have been made on this account.

“The intent of SEBI in levying margins is to control “mule” accounts and reduce risk. We firmly believe that the intent of SEBI will not, in any manner, get diluted if the suggestions are taken into consideration,” the letter said.

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Published on July 14, 2020
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