The Securities and Exchange Board of India’s (Sebi’s) new margin norms may hit traditional brokers harder than the new-age discount brokers or those that cater to institutional clients.
Market players said the new margin pledging norms were more suited for online brokers, where clients were typically internet savvy. For an offline broker, the client either visits the branch or places orders through the telephone. Creating a pledge, however, requires authentication on the depository website.
“The client now has to give the OTP to the broker over the phone to create a margin pledge. This defeats the purpose of the new system and also creates lot of back and forth between the client and the broker. So ideally the client has to go to the branch and trade on their terminal,” said an industry player, who pegs between 30 and 40 per cent of retail trades still take place using telephone calls.
Industry players said brokers have squared off and moved to the new margin system for the cash market. However, there are lot of open positions in futures and options (F&O) where margin has been provided through collateral accounts by use of power of attorney (POA).
“For F&O, if the client doesn’t confirm the pledge in his account, how will the broker transfer the stock from the collertal account to client account? Sebi should have ideally given time till the expiry of the contracts as the positions would have expired and got automatically squared off,” said a broker. Market players are now lobbying the regulator to allow brokers to obtain a PoA digitally.
“Smaller or regional high-risk broking will suffer. However, this also means opportunities for national brokers like us who are investing in technology and advice. It’s a big step forward in the longer term for the industry and will leave collateral damage as any transition does. Common margining means more value to be provided to clients as well as makes broking safer,” added Sandip Raichura, CEO – retail, Prabhudas Lilladher.
Industry players say the new norms have thrown the market infrastructure, including exchanges, depositories and clearing corporations into disarray. On Friday, CDSL, ICCL, NSE Clearing and NSDL issued a joint statement saying that a significant amount of margin pledges/repledges had seamlessly been processed since September 1 and the new margin pledge process was expected to stabilise in the coming week.
The exchanges have also deferred the levy of penalty for client margin shortfall, non-collection and reporting in cash and derivatives segments to September 15, citing system congestion owing to the large number of client securities being pledged.
Industry players said brokers would wait till September 15 for the F&O clients to provide margins under the new system and if they failed to do so, they would square off outstanding positions. The monthly F&O contracts expire on the last Thursday of every month.
Dhiraj Relli, MD & CEO, HDFC Securities, said more than offline versus discount brokerage, it was more between players, who provided extra leverage vis a vis who did not.
“With respect to margining, it had reduced leverage in the system. Hence, brokers who offered more leverage basis relationship may stand at a disadvantage, since it now does not allow them to provide more leverage and has restrictions on it,” he said.
Brokers will have to do away with the intra-day margin trading products in a phased manner starting December 2020. By August 2021, they will be restricted from taking any additional leverage in intraday trading.
“The change won’t impact discount brokers much as they have standardised processes already. The traditional broker’s USP was this additional margin which it provided its ‘elite’ customers which no longer exists. Clients will have to maintain a higher margin in their account to continue trading intraday, which translates lower return on investment for some,” said Arshad Fahoum, chief product officer, Market Pulse.