Sebi's new peak margin framework to reduce broking volumes in short term: Experts

Markets regulator Sebi's new framework on peak margin reporting, which came into force from Tuesday, will affect intra-day trades and reduce the broking volumes in short term, stock brokers said. The new rule, which is aimed at preventing brokerages from giving excessive leverage to traders, will also reduce speculative trades, they added.

Under the concept of peak margin reporting, a clearing corporation is required to inform traders and investors at least four times a day about their margin requirements. The present system does not require such updates. "The new peak margin rule will reduce the broking volumes in short term but it will also reduce speculative trades and thus would provide longevity to the traders," said Rajeev Srivastava, CBO at Reliance Securities.

He further said that brokers who have in-house research teams will be able to balance their revenue steams better by focussing more on delivery based transactions. "At the current rate of 25 per cent, market can absorb the impact, however, if Sebi progresses as per the circular to 100 per cent it will have a severe impact on market volumes," Rajesh Baheti, director at stock brokers' association Anmi, said.

Until now, brokerage houses could offer any amount of intra-day leverage. Starting Tuesday, there is a maximum intra-day leverage that can be offered by them. The brokerage houses said the new framework would affect intra-day traders. As intra-day trades generate the maximum revenues and volume, the move is going to impact the industry.

Further, this maximum intra-day leverage offered by brokers would keep going down in a phased manner. From December 1, a trader is required to have 25 per cent of peak margin in her/his account. This will be 50 per cent from March 1 and thereafter 75 per cent for subsequent three months and finally 100 per cent from September 1, 2021.

Tejas Khoday, CEO of FYERS -- a technology-focused stock broking platform -- said the peak margin mechanism is designed to prevent brokers from providing leverage over and above the Sebi stipulated limits. "Sebi also passed a new rule which disallows brokers to pass on margin penalties to clients. Essentially, with this move, the burden of margin shortfall will have to be borne by the intermediaries and not the clients," he added.

While the peak margin rules aim to eradicate excess leverage from the capital markets ecosystem, Khoday said there are several matters which need further clarification. In its letter to Sebi last month, Anmi had requested the regulator to dispense with the concept of peak margin as the framework will have a domino effect on the business models of the brokers and the exchanges. "By indirectly not allowing brokers to provide intra-day leverage to their clients from their own capital through the mechanism of peak margin is unjust," the brokers' association had said in the letter.

According to an estimate, almost 90 per cent of the turnover at the exchanges comprises intra-day business..