The implementation of SEBI’s new upfront margin rule is likely to be delayed till April, when the clearing corporation and exchanges start collecting penalty for non-reporting of margin collection.

Stock brokers are currently preparing their clients to adjust to new rules that came into effect from January 1 and are yet to make it compulsory for them in the absence of any penalty being levied. On January 8, in a meeting with brokers, SEBI also asked them to come up with their proposals to fine-tune the new regime, sources in the know told BusinessLine .

According to the new rule, margins will have to be collected on all kinds of equity trades including intra-day, both for cash and derivative segments, and for buying and selling.

In a meeting on January 8, brokers told SEBI that it could be a severe drag on volumes as all kind of intra-day trades will require upfront margin. There is a view that the current margin in the derivative segment was suitable to cover two-day risk but making the same amount of margin applicable for intra-day trades could hurt intra-day traders and all algorithm strategies.

Intra-day trading in stock markets currently constitute around 70-80 per cent daily volumes, brokers say. There is a view that the margin currently charged in the derivative segment covers 99 per cent of the risk.

Algo strategists and several intra-day traders who transact for a few minutes would find it difficult to pay a full upfront margin that is charged to traders who are playing for a longer duration, said a Mumbai-based proprietory trader.

Span, exposure, ELM margins

There are two types of margins that brokers have to pay to the exchange — SPAN (standardised portfolio analysis of risk), and exposure margin. In addition, there is extreme loss margin (ELM). All of these for trading a single lot of Nifty index futures, which work out to 11.3 per cent.

Considering the current level of Nifty at 12,300 for one lot, the margin is ₹1,300. It means that if Nifty falls by 11.3 per cent in two days, a very rare occurrence, the margin would be adequate. Now, if this margin is also levied for a trader who wants to do a transaction just for a few minutes during the day, it would be harsh and the trader will not be interested.

It will mostly hurt algo strategy traders, brokers say. To make it more difficult, the trader will have to decide before the trade if it is intra-day or carry forward or alternatively will have to enter two legs of trade to carry forward. Brokers have to report this margin collection by end of day or face penalties.

Broker associations will be submitting their proposals on various issues to SEBI by next month, the sources said.

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