Brokerages want bourses to revisit margin norms ahead of implementation

New directions suggest clients cannot use sale proceeds for other trades

Brokerages have asked exchanges to reconsider guidelines on margin collection and reporting, which suggest clients cannot immediately use sale proceeds from their stock positions as credit for other trades.  

"For a stock that is delivered, there is no bona fide reason to deny credit for the entire amount,” said Rajesh Baheti, director of the Association of National Exchanges Members of India and managing director of Crosseas Capital.

“There is no risk here as there is guaranteed money after the delivery of the security,” said Nithin Kamath, co-founder and chief executive officer, Zerodha, the country’s largest brokerage in terms of active clients.

In a set of frequently asked questions issued recently, exchanges said that securities which are sold in the cash market and those which are available in a trading member’s account, such as pool/early pay-in, will not be considered as margins collected for any other trade or position.
 

Under the current framework, settlement of stocks typically takes two days from the day of trade, i.e. T+2.

 

 

A senior executive of another brokerage said that the suggestion that sale proceeds cannot be used immediately anymore is problematic. “We are seeking clarity from exchanges,” he said.

Participants say the move can also have an overall impact on the liquidity in markets. “It will reduce liquidity and increase impact cost as it inhibits the flow of transactions due to barriers on how funds can be utilised,” said Tejas Khoday, co-founder and chief executive officer of FYERS, a stockbroking platform.Earlier, there were concerns that clients would need margins to sell shares lying in their demat accounts. However, market participants say that brokerages with technological capabilities can work around this, using the early pay-in or EPI mechanism.

If the broker can debit shares from the demat account and give them to the exchange on the same day that the shares were sold by the client, the broker can allow the client to sell without an upfront margin.

Brokerages are working on their technologies to facilitate this starting August 1, but say that it will still take a few days before all brokerages are able to provide this facility.

“Clients are likely to face some teething troubles during this phase of transition,” said an executive at another brokerage.