Stock brokers seek relaxation from collateral norms

Say move impractical, ask NSE to rework modalities

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 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 (Anmi) and BSE Broker’s forum have made representations to the exchanges and 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.

image
Business Standard
177 22
Business Standard

Stock brokers seek relaxation from collateral norms

Say move impractical, ask NSE to rework modalities

Samie Modak  |  Mumbai 



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 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 (Anmi) and BSE Broker’s forum have made representations to the exchanges and 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.

RECOMMENDED FOR YOU

Stock brokers seek relaxation from collateral norms

Say move impractical, ask NSE to rework modalities

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.

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 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 (Anmi) and BSE Broker’s forum have made representations to the exchanges and 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.

image
Business Standard
177 22

LIVE MARKET

BSE

  ( %)

NSE

  ( %)

More News

  • New acquisition sets the wheel in motion for JK Tyre Tyre stocks in focus; JK Tyre, Balkrishna Industries hit 52-week high
  • Nifty holds 8,550 amid choppy trades; Tata Motors rises 4% Markets edge higher; Nifty reclaims 8,600

STOCK WATCH

Company Price() Chg(%)
Delta Corp 157.10 8.20
S H Kelkar & Co. 324.20 7.76
Balkrishna Inds 833.50 6.67
Titagarh Wagons 119.05 6.58
Central Bank 106.90 6.47
> More on BSE Gainers
Company Price() Chg(%)
S H Kelkar & Co. 325.60 8.14
Delta Corp 157.45 8.14
Central Bank 107.70 6.85
AIA Engg. 1251.35 6.34
JK Tyre & Indust 130.40 6.32
> More on NSE Gainers
Company Price() Chg(%)
Hexaware Tech. 197.85 -5.04
GVK Power Infra. 6.26 -4.43
8K Miles 1945.90 -3.55
Gati 143.25 -3.41
GRUH Finance 333.60 -3.36
> More on BSE Gainers
Company Price() Chg(%)
Parsvnath Devl. 16.25 -9.47
Future Lifestyle 127.50 -7.37
Ratnamani Metals 557.70 -6.01
Hexaware Tech. 197.80 -5.02
GVK Power Infra. 6.25 -4.58
> More on NSE Gainers
Widgets Magazine
Widgets Magazine
Widgets Magazine

Derivatives

Index
Instrument Type
Expiry Date
Option Type
Strike Price

Upgrade To Premium Services

Welcome User

Business Standard is happy to inform you of the launch of "Business Standard Premium Services"

As a premium subscriber you get an across device unfettered access to a range of services which include:

  • Access Exclusive content - articles, features & opinion pieces
  • Weekly Industry/Genre specific newsletters - Choose multiple industries/genres
  • Access to 17 plus years of content archives
  • Set Stock price alerts for your portfolio and watch list and get them delivered to your e-mail box
  • End of day news alerts on 5 companies (via email)
  • NEW: Get seamless access to WSJ.com at a great price. No additional sign-up required.
 

Premium Services

In Partnership with

 

Dear Guest,

 

Welcome to the premium services of Business Standard brought to you courtesy FIS.
Kindly visit the Manage my subscription page to discover the benefits of this programme.

Enjoy Reading!
Team Business Standard