The use of ‘non-funded’ fixed deposits (FDs) as collateral to get a trading limit in equity and commodity markets has come under the scanner of the Securities and Exchange Board of India (SEBI).
The regulator has sought details of ‘cash collaterals’ from exchanges’ clearing corporations (CC), where private banks promise ₹100 worth FDs against ₹50 actually deposited by a broker.
Yet, banks call such an arrangement a ‘funded bank guarantee’ and the CCs have extended trading limits to brokers against it. Banks earn a fee on such guarantees.
CCs are exchange-promoted entities that settle trades taking place on an exchange platform and handle the risk management. Every broker has to deposit cash and other liquid assets as collateral with a CC to get a trading limit.
The required margin
On an average, stock and commodity exchanges combined churn volumes of more than ₹5-lakh crore daily. Roughly, a broker has to maintain 30 per cent or more as margin. FDs as collateral could form 25-50 per cent of a broker's entire margin, which consists of liquid assets. For a volume churn of more than ₹5-lakh crore, brokers would require collateral of over ₹1.5-lakh crore.
Currently, in the equity markets, the open interest (OI) in the index futures segment itself has crossed ₹25,000 crore.
Add to this the OI of more than ₹1-lakh crore in the stock futures segment. Recently, in the commodity segment, when crude oil prices crashed below ₹1, SEBI saw risk from ‘non-funded’ FDs as collateral.
“Only the funded (backed by broker deposit) portion of the cash collateral is to be considered for the purpose of (margin) calculation.
“However, trading members are showing the full amount of funded fixed deposits (broker deposited plus bank funded) as collateral in their enhanced supervision reporting to the exchanges,” SEBI said in a recent communication to stock exchanges and CCs. The regulator has sought details of corrective measures taken by the exchange CCs.
By SEBI’s new rule, brokers now have to collect full margins from clients and any short reporting will attract penalties.
Emails sent to the NSE, Multi Commodity Exchange and the National Commodity and Derivatives Exchange did not get any response. The BSE said it would not comment.
Bilateral arrangement
A source close to the NSE said FDs are a bilateral arrangement between banks and brokers and the CCs would not come to know of it. Also, CCs were accepting bank guarantees based on net-worth criteria of banks, the source said.