Institutional traders staring at peak margin costs from December 1

PALAK SHAH Mumbai | Updated on November 23, 2020

There is a concern now about the new margin norms leading to higher margin payment for institutional players including foreign participants.

The fear is among the broker community due to the ‘peak margin’ collection norms. From December 1, stock brokers will have to collect margin for all the clients including custodian-settled clients even for the peak margin intra-day. Every trader in the stock markets needs to bring some margin money to trade.

So far, the institutional clients did not give any margin to brokers for intra-day trades. But, that will have to be collected and also reported now. The difficulty is that custodian of shares, which is a third party agent mostly a bank too, is required to collect margin for the same transaction but the broker cannot pass it to a third party. Hence the clients will end up paying double margin, brokers fear.

In most cases so far, brokers financed their clients out of their own pockets in the derivative segment. But that will change as brokers have to report collection of margins from clients or face penalty.

An office bearer of a broker association said: “The issue of peak margins impacting custodian settled trades has been flagged to the regulator. We are confident that the authorities will resolve the matter very shortly.”

Settlement mechanism

Currently, there are three kinds of clients that include custodian-settled institutional clients, custodian-settled non-institutional clients (PMS, some HNIs etc.) and other non-custodian-settled clients (including retail players). In the case of the first two types of clients, trades are done by the broker and then taken up by the custodians at the end of the day. All settlement is seen by the custodians.

Clients or traders could have cut all their positions by end of day and hence their margin payment obligations to a broker becomes nil but when the settlement process reaches the custodian, the broker still will have to pay going by the ‘peak margin collection’ norms, brokers say.

There is no problem on this in the cash segment since clearing corporations, those who settle trade, do not charge margins for institutional trades intra day. But institutions will have to pay the margin in the derivative segment even when they hold no position. For other clients including portfolio management services and high net-worth individuals there is a problem in the cash segment too as they are required to bring margin.

Peak margin is the collection or reporting of client margin by stock brokers during the day based on peak theory. 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.

Published on November 23, 2020

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