Exchanges put the onus on clearing members to report peak margins

Shortages in reporting shall be considered as shortfall of margin collection and a penalty will be levied on the clearing member of the custodian participant

Exchanges have placed the onus on clearing members to report peak margins and penalty for short reporting in the derivatives segment, even in cases where trades are rejected owing to mismatch or error.

The NSE, in a circular on Thursday, said clearing members are required to report end-of-day and peak margins, according to the file downloaded by the clearing corporation.

In case of any shortcomings in reporting, the same will be considered as shortfall in margin collection, and a penalty will be levied and collected from the clearing member of the custodian participant.

Unlike retail investors who trade and clear the trade through the same broker, foreign portfolio investors (FPIs) use multiple brokers to trade, but clear and settle the same through clearing members.

Custodians — often the same entities playing the role of clearing members — had raised concerns with the markets regulator a few days ago.

“Globally, custodians and clearing members provide confirmation with respect to margins and collateral for trades confirmed by them. It would be unfair to levy penalty for inadequate margins for unconfirmed trades,” said an industry official.

Clearing members may be unable to calculate the penalty. It is unclear how they will recover the same from either the clients or trading members, he added.

A client’s peak margin requirement vis-a-vis a trading member should neither be monitored by the clearing member nor confirmed to the clearing corporation, unless the intention is to report margins on net positions. The peak margin concept will be applied in the derivatives segment from December 1 in a phased manner, wherein the clearing corporation will compare the client’s intraday position versus the available margin. Any shortfall will be construed non-compliance. 

The objective of the peak margin is to curtail the leverage given to clients in derivatives. Estimates suggest that FPIs’ share in total derivatives volumes is about 15 per cent. This translates into average daily volumes of Rs 2-3 trillion.

Asia Securities Industry and Financial Markets Association, which represents several foreign investors, has reached out to the Securities and Exchange Board of India (Sebi), asking it to defer the implementation of the peak margin norms by at least three months and reduce the penalty for not maintaining adequate margins.

It said no other jurisdiction had requirements like those outlined in Sebi’s July 20 circular, which would result in institutional clients having to maintain collateral with their trading members, in addition to the margins and collateral they maintain with their custodians. This could lead to higher transaction costs for investors and credit risks for trading members.