Sebi unlikely to extend deadline to implement new margin pledge rules

Sebi did not have any margin requirement for cash market transactions.

By Malini Bhupta

Market participants on Monday met with the Securities and Exchange Board of India seeking more time to implement the new rules on margin obligations, which are set to kick in from September 1, 2020. FE has learned that the regulator is unlikely to concede to the demand, as enough time has been given already.

Sebi had said last year that brokers would need to collect upfront 20% margin for cash market transactions. The regulator also came up with a new set of guidelines on how clients could use existing securities in their account to fund their margin requirements.

Most large broking firms have the technological capability to implement the complex new pledging mechanism, whereby a client would have to create pledges for every security separately depending on the need for margin funding.

Ashish Rathi, whole time director at HDFC Securities, said the regulator wants to discourage speculation in the cash market, which is why it has imposed upfront margins on cash market transactions. “We don’t see an issue in implementing the new pledge mechanism, however, more time was needed for the same.”

For those who wish to trade against existing securities as pledges, the regulator has mandated a whole new way of creating pledges. The new margin funding norms through pledges will add a layer of complexity to what is currently being seamlessly done by brokers through their internal risk management systems. What is making life difficult for brokers is not implementing the new system, but unwinding existing pledges on client securities. Unwinding these pledges and simultaneously implementing the new ones is a challenge. Shankar Vailaya, director at Sharekhan, said while this is good for the market, systems are yet to stabilise and clearing out old pledges is taking time.

As per Sebi’s February 25 circular, a client can pledge securities with a trading member, who would in turn re-pledge the same with clearing member (CM), and CM in turn would re-pledge the same to Clearing Corporation (CC). Despite the pledge on the security, it will remain in the demat account of the client. The complete trail of such re-pledge will be reflected in the de-mat account of the pledgor/client.

The new margin system for cash securities and the new pledging system have some market participants up in arms as they feel it is cumbersome and will lead to higher impact cost for clients and higher compliance costs for market participants.

Shripal Shah, president and head (operations, finance and technology) at Kotak Securities, said the regulator is keen on a system where the client can see the entire trail of his securities pledged and what is happening to it, which will ensure that client securities are completely segregated and protected. It is a major system change, and therefore, participants asked for more time for its implementation.

Market participants have been seeking a deferral of both the imposition of 20% margins on cash market transactions and implementation of the new pledging norms, as it could impact market’s volumes. So far, Sebi did not have any margin requirement for cash market transactions, but now clients will have to cough up 20% for such trades. This will be applicable to buying and selling of securities.

However, if the depository participant transfers shares to the clearing corporation the same day of the trade, then 20% margin money will not be required for selling the shares. Similarly for intraday trades, this upfront 20% is not mandatory as the position is squared off at the end of the day. If shares leave the depository the day of the trade — known as ‘Early Pay-in” — then the 20% margin funding will not be required for selling shares. This is a relaxation Sebi has granted the market participants.

Large brokers who have invested in technology claim that there is no problem in executing this as the regulator has given time till 9 pm to transfer shares. The problem occurs when a client buys securities and wants to sell them the next day (known as buy today sell tomorrow) or BTST trade, then the margin will have to be given for buying and selling shares, taking the upfront cost to 40% value of the trades. This is because a sale is being executed of a security that has not yet reached the demat account of the cient. So a 20% margin to buy and another 20% to execute the sale will have to be paid. The broker cannot transfer securities the next day, so a client will have to pay upfront margin for the BTST trades to sell shares too.

On Saturday, market participants held a dry run of this new pledging system whereby clients have to apply for pledging on the platform of the brokers, and in turn an OTP would be generated for him/her to authenticate the pledge. This process requires different entities to seamlessly execute such requests and many claim that normalising such a complex system would take time. On Saturday, the experience was mixed as in many cases it took several hours for the links and OTP to be generated.