In our previous blog, https://www.plindia.com/blog/sebi-the-new-policies-impacting-trading/, we had indicated changes that may soon be introduced by SEBI and what these could mean. What has actually come is substantially more impactful than we envisaged!
UPDATE: A circular yesterday (29/7/20) has allowed brokers to accept title transfers from DP accounts till Aug 31, 2020 versus July 31 2020 deadline.
WHATS UP!
Over the past few days, there is tumult in the broking industry as SEBI decided to go ahead and implement a wide range of measures – defining contours of what upfront margins are as well what margins mean – that not only stress out the systems in place currently but also create huge uncertainty about the shape the industry may take in the future.
Purportedly done to control risks to the system- as evidenced by the misuse of funds and securities by some well known brokers and discovered by regulatory audits, the new proposals have nevertheless confused investors and brokers alike. And possibly sounded the death knell on certain quarters of the industry.
In addition, misreporting by leading dailies is creating further confusion – with headlines like “SEBI postpones upfront margins” and so on , ensuring that people aren’t listening clearly to whats being said and ignoring the guidelines that go into effect August 1, 2020 (Whats postponed is the penalty based on peak margins – and not upfront margins – Because as per the regulator, collection of upfront margins was always supposed to be the case!)
The Industry wont be the same again!
We present a lowdown on developments below and remember, things are still in motion as the industry represents its interests vociferously to the regulator in the dying moments of the month .
Background
Derivatives , because of their inherent leverage and longer tenures to settlement, have always been an upfront margin based instrument and technology / real time systems enabled brokers to extend “intraday multipliers” as well without creating risk to the system- we dont know if its right or wrong – but its been working fine. Also it gave birth to parallel industries like algorithmic traders, option strategy writers etc who imparted jobs, liquidity and fair pricing.
In the cash segment however, brokers were allowed to follow a net settlement procedure without worrying about client level margin collection as the margins were adequately blocked upfront by exchanges anyway for a tenure till T+2 post which the settlement margin itself is debited. Low risk in the system meant the brokers were also comfortable, basis their risk management policies, allowing clients limits as long as clients were trustworthy and reliable and settled their accounts in time.
Of course, certain investors like mutual funds , PMS providers and NRIs etc have had some of these restrictions but then these are not the ones that traded often – these were mature larger players. And of course there were scrip categories where anyways margin was upfront or intraday was not allowed to retail either.
This all changes now – the exchanges are implementing an FNO like margin and penalty structure in the cash segment as well. And specifically now also changing what “margin” means.
And in addition, they have clarified that “ I will take penalty in my own account” kind of clients will not be allowed to trade– Cough up margin or it’s the broker who will be penalized!
What Changes
The new guidelines are to be implemented in phases as follows
- A temporary phase till August 31 where margins are allowed to be considered for reporting from Client Unpaid Securities Account and Collateral account but no new transfers to brokers are allowed from POA (Please do ensure you have transferred securities to PL Collateral account before July 31 for uninterrupted trading till August 31, 2020) and only pledged stocks will be accepted afresh
- From August 31 onwards, no other collateral except pledged stocks as margin. PL is creating a facility at www.plclients.com to enable pledging which will have to be then verified via CDSL sending an OTP to the client. This will create pledge in system and allow limits in our trading systems else not.
- Phasing out of intraday trading products begins from December 1 when the “peak margin” availability with broker comes into focus and by August 2021, only 1x exposure will be possible.
Will the pledging process be easy? Will people who don’t use smartphones be able to do ? or older citizens will be able to trade conveniently? We don’t know yet as CDSL is yet to showcase its systems to brokers and some of us havent maybe understood the implications yet – thanks to forwards of misreported articles!
TRANSACTIONAL ISSUES
No more can you sell a share and assume that you will get limits for another trade as upfront margin required as each trade will require an upfront separate margin. And since sale proceeds come on T+2, they are not to be considered as margin. Ditto for long option positions as proceeds will come on T+1. Yes, the upfront margin requirement will be pardoned for sale transactions as long as an early payin is done on same day by the broker.
BTST goes for a toss as the stock that you sell on T+1 is still not there so you will have to maintain other adequate margins upfront to be able to sell.
Intraday realized profits were often used for entering fresh positions or often, brokers allowed option sell credits for other use on T day – both these practices stop. We often also used sale of shares to fund mark to market losses to avoid penalties – that also goes away!
Also while all margins are fungible across segments, any excess in normal accounts will not be available for MTF and vice versa. Both these will operate separately. And since the stocks have to be released to the DP account on settlement, brokers will have to ensure that if the client doesn’t create a pledge by T+1 on the funded stocks, these positions will have to be sold immediately.
An article forwarded by a friend also talks about how Liquid ETFs , which were often used to park temporary surpluses till a trade could be taken could also get impacted as proceeds from sale cannot be used immediately.
And yes of course, irrespective of your wealth, the broker will shudder to give you limits unless you have transferred margins upfront via pledge or funds transfer. The bigger the potential shortfall the bigger the penalty on the broker!
For clients not having POA in their accounts or having external DP accounts, brokers will need to have upfront margins from them for all trades in the form of funds or pledge to the broker settlement account from their external DP or from DP account with us before undertaking a transaction.
Transfer of Margins- Learn!
The client can pledge the securities to the broker which is valued at T-1 day price with applicable haircut using the new margin pledge system that will soon be introduced.
The client can also transfer the funds electronically through NEFT/RTGS/ IMPS but on same day of trade else a shortfall will be reported. At PL, we advise all our clients to use the ATOM Payment Gateway through the mobile phones (Download and activate PL Mobile App from Playstore/Applestore) and www.plclients.com, rather than cheques and NEFT/RTGS, to avoid delays or delayed recognition – remember any miss will mean a penalty and to avoid that, brokers will generally avoid any limits basis commitments.
Note that if the client is uncomfortable using plclients.com, he can also use the YesBank Pay Now facility (Read more at www.plclients.com/banking/funds transfer) by registering our bank account in his own mobile app to avail limits immediately.
If a cheque is given on the day of trade , the same has to be deposited latest on next working day of Bank . The cheque has to be cleared within 5 working days , else the same will be reported as non-compliance of available margins.
Also clients should ensure that all their mobile phone, email id details etc are updated to receive the SMS from CDSL. Clients can do these changes themselves at www.plclents.com in their own client profile section, present in the top right menu.
The Final Hours!
A lot of smaller sub brokers and brokers have often depended on the cash segment for their livelihood – ensuring that good quality stocks are purchased as a BTST trade and sold the very next day – to earn a small return per day for the client as well as themselves without putting the system to any risk.
Similarly, brokers have often allowed themselves to distinguish between “important” and “normal” clients and built long standing relationships – remember they have already paid the margin so it’s a judgment they are taking on settlement ability. This is now at risk.
Pledging of margins one may argue is an important step and maybe very relevant to prevent margin comingling issues but then adequate time should have been provided to the community of brokers and investors for this new regime. Plus the regulators should have marketed this on media to prepare everyone, like AMFI did for mutual funds. Imposing an as yet unknown process with a short timeline is creating havoc!
One may also argue why the regulator didn’t straight move to a situation of T+0 settlement because that would have allowed all financial and depository apart from exchange systems to move in sync and brokers wouldn’t have worried about the strains on the system. And prior to that, they could have integrated systems at their own levels across regulators to monitor broker margining and trading activity rather than making brokers responsible and disturbing the entire system. That too in Covid times!
The cash market especially is a relatively low risk market from a settlement perspective and within that, margins on sales seem extremely illogical. ANMI reports show that the failure on delivery accounts (Auctions) for hardly any value at all on a daily basis and by killing a traditional business like BTST, without clear rationale, is going to impact livelihoods and volumes.
On the other hand, the circular talks about how lien marking on a bank account will be treated as upfront margins – does this not put Bank brokers at a significant advantage? Is that fair?
Also, Isn’t small systemic risks that may happen once a while the reason why the guarantee mechanism is there in the first place? Why uproot the entire system?
And why do this all in Covid times where cheque collection, DIS printing, working into late hours on days when files come at almost 9 pm – what was the hurry?
We are keeping our all our limbs crossed – and if you were using leverage so should you- that the regulators come in at the last minute and save the day! Watch this space!
——– Co-Author: Sai Kiran, Vice President for Risk and Operations
Visit to see margin methodlogy as well as values : https://www1.nseindia.com/products/content/equities/equities/margins.htm
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