After a meeting with officials of the Securities and Exchange Board of India (Sebi) and the National Stock Exchange (NSE), brokers are expecting the diktat that asks them not to provide client securities as collateral, to be relaxed.
NSE, in a clarificatory circular on April 26, had said in the equity and currency derivatives segment brokers will need to deposit their own shares with the clearing corporation. It said brokers should collect interest from their clients for funding their margin amounts.
To meet this norm, brokers say, they will have to cough up over Rs 15,000 crore (about 15 per cent of the Rs 1,25,000 crore current open positions in the futures and options (F&O) segment). They say it is not viable to fund such a huge amount. Levying interest charges will further escalate transaction costs, which will hurt volumes, they point out.
While conceding the purpose of the circular was valid, brokers said asking them to deposit their own shares as collateral is not a practical solution to the problem. In their discussions with NSE and the regulator, they have suggested a different approach.
Among the suggestions given, brokers have asked clearing corporations to set up a client-wise segregation mechanism to enable them to see that the collateral given by the brokers belongs to the right client. Alternately, they have suggested NSE should step up a process to validate whether the margin amount deposited by a broker corresponds to the appropriate client.
“Nowadays, broking businesses are working on very thin margins and most of them are running in losses. In such a scenario, they cannot afford to have their own stock for deposit with the clearing corporation towards margin,” R Mohan, chief compliance officer, IIFL, had said in a statement earlier.
Brokers associations, including the Association of National Exchange Members of India (Anmi) and BSE Broker’s forum have made representations to the exchanges and Sebi and are expecting some relaxation from NSE within the next few weeks. Rakesh Somani, chairman at Anmi said, “We have explained to NSE the difficulties in implementing the circular. NSE is open to the idea. It may come out another clarification soon.”
Emails sent to Sebi and NSE on the subject remained unanswered.
The rationale behind asking brokers to deposit their own shares as collateral is to prevent them from using one client’s margin to fund another client. In some cases, brokers provide excess margin to clients who clock high volumes by providing shares of other less active clients as collateral.
When NSE had issued the circular in April, it had resulted in a lot of confusion among brokers, who felt it was against Sebi norms. However, a senior Sebi official told Business Standard that the circular was in compliance with Sebi norms and the rules were in place for the last few years. Experts said NSE had to issue a clarificatory circular as the norms were not being strictly followed by brokers.