FPIs fret over peak margin norms, urge Sebi to defer implementation

Norms have a framework for verification of upfront margin collection in cash and derivatives segments. Peak margin is the reporting of client margins by trading members during the day

Foreign investors have reached out to the markets regulator, Securities and Exchange Board of India (Sebi), asking it to defer the implementation of the peak margin norms by at least three months and to reduce the penalty for not maintaining adequate margins.

The new norms prescribe a framework for verification of upfront margin collection in the cash and derivatives segments. Peak margin is the reporting of client margins by trading members (TMs) during the day based on peak theory. They come into force from December 1.

Asia Securities Industry & Financial Markets Association (Asifma), which represents many foreign investors, has written to Sebi stating that alternative solutions need to be thrashed out by all market participants to implement the circular, which could require considerable time.

It said that 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. Also, as moving margin collateral from one trading member to another may not be operationally feasible, this may restrict the choice of trading members for the clients, impacting execution. It said the existing practice of TMs depositing collateral with clearing corporations ahead of trading is optimal from risk management and cost efficiency perspectives.

Asifma has requested Sebi to put a cap on the penalty, which stands at 1 per cent of the notional value. “We submit that 1 per cent is too high and out of line with existing requirements. For example, for existing breaches, there is a penalty cap of Rs 100,000,” it said.
 

Asifma’s contentions

• Seeks extension of deadline to implement peak margin norms by three months
• Failing to do so may result in market consolidation and concentration risk
• India only jurisdiction to implement such margin reporting norms
• Seeks reduction in penalty for not maintaining adequate margins
• New norms could result in higher transaction costs for investors and credit risks for trading members
• May restrict the choice of trading members for the clients, impacting best execution

 

Along with the Futures Industry Association (FIA), it has also suggested a workable solution with operational guidelines for implementing the new norms along with two alternative solutions and the challenges each one may pose.

“In order to avoid market disruption and a significant negative impact on ease of doing business in India for institutional clients starting December 1, we urge Sebi to adopt our proposed solution and extend the implementation deadline to allow the exchanges and clearing corporations sufficient time to implement the system changes,” it said, adding that failing to do so may result in market consolidation and concentration risk.

The optimal solution proposed is a collateral reporting mechanism between custodians and clearing members, wherein clearing corporations and exchanges agree on a mechanism to implement a pre-trade check that ensures that any trades that cross, say, 90 per cent margin utilisation will not be executed for lack of sufficient margin. To address any concerns from high-frequency trading clients on the latency of trade execution, pre-trade checks will be immediate and margin allocation will be on a ‘first come first served’ basis, with only the last trade that crosses the 90 per cent margin utilisation cap being rejected.

The second solution suggested is that confirmation on peak margin at various snapshots should be taken from the custodians instead of TMs on the basis of the custodial participant (CP) code allotted to clients. The penalty for shortfall in margin would be levied at CP level and collected from custodians. TMs should be responsible for the trade erroneously booked on behalf of clients and should be responsible for the shortfall and penalty once identified.