Mumbai: India’s capital markets regulator plans to make it mandatory for brokers to collect money upfront as margin from all investors before initiating trades in cash segment. At present, this is left to the discretion of brokers.
“It’s not very transparent how brokers manage risks if there is a client default. To avoid this, we are working out ways to make client-level margining compulsory in the cash segment,” a senior official of Securities and Exchange Board of India, or Sebi, told Mint, speaking on condition of anonymity.
For trades in derivatives segment, brokers are required to collect a margin upfront from investors.
According to the National Stock Exchange’s website, clearing members and trading members are required to collect upfront initial margins. The Nifty futures margins level is 10% and the margin requirement for stock derivatives varies from 15-35%, depending on the volatility of stocks.
For the cash segment, there is no such clear directive, though there is a suggestion that margins could be a part of risk management.
The Sebi move to have similar norms for both cash and derivatives follows the recent tightening of the rules governing brokers’ ability to act on behalf of investors. Till recently, brokers used to have clients sign sweeping power of attorney agreements, giving them a free hand on the securities. Sebi has found instances of misuse of these by brokers, leading to many investor complaints.
Currently, brokers themselves keep margins with the exchanges for transactions in the cash market but they cannot force clients to pay the margins. The margins deposited by brokers remain blocked till the settlement is completed.
Making client-level margins compulsory will make the system more robust, say market intermediaries. A member of the secondary market advisory committee of the regulator said the proposal has recently been discussed and once implemented it would improve the risk management of brokers.
“A 15-20% margining at client level will bring in more transparency and better risk management at brokerages. Right now, the brokers focus on their clients’ track record but do not insist on margins always,” said Ambareesh Baliga, vice-president, Karvy Stock Broking Ltd.
Anup Bagchi, executive director, ICICI Securities Ltd, said bringing the risk management of equity cash segment on a par with that of derivative segment is a sensible idea.
Client-level margining was in vogue till 2005 and was substituted by broker-level margining. According to Deepak Jasani, head of research, retail, HDFC Securities Ltd, brokers will gain as there will be more liquidity, but the collection and compliance costs will increase. Besides, the banking and depository infrastructure have to be in the right place to support real time fund and share transfers.
“To handle these issues, one way out is to have a threshold of trade beyond which client level margining may be made mandatory,” he said.
But some brokers are already collecting margins from their clients and for them it will be a only a matter of reporting such collections. “Though it’s at the discretion of brokers, we collect upfront margins for all our clients. These days volatility is high and open positions (trade orders without margins) expose us to greater risks,” said Dinesh Thakkar, chairman and managing director, Angel Broking Ltd.
According to him, the risk in cash segment is not as high as in derivatives. “Derivatives contracts stretch for a month, while the cash transactions come for delivery on the third day,” he said. Besides, since cross-margining is allowed any unused margin used in derivatives trade can be utilized for the cash segment.
Ashu Madan, president-equity broking, Religare Securities Ltd, a New Delhi-based brokerage, said when the proposal becomes a norm, it would make life tougher for all participants, including the customers. “Some of my customers make one transaction in three months. It will be unfair to expect them to keep the margin money idle with me all along,” he said.
The settlement process also could get affected, said Manish Sonthalia, portfolio manager, Motilal Oswal Financial Services Ltd, as it could create multiple levels of reporting on margins to exchanges and clearing houses. But introduction of client level margin could bring down the intra-day volatility in the market, he added.