New margin framework may aggravate the selling pressure: Brokerages

Brokerages fear that implementation of the new margin framework from Tuesday may aggravate the selling pressure, with several market participants yet to migrate to the new framework. This could lead to unwinding of client positions.

“Several clients would be required to un-pledge their securities from the old regime and re-pledge them under the new regime. Those that will not be able to re-pledge in the new regime could see their securities getting sold on Tuesday. There may be margin calls,” said the head of a broking house.

“We could see some impact on volumes till the system settles down,” said Rajesh Baheti, managing director (MD) of Crosseas Capital.

Brokers will also be required to collect 20 per cent upfront margin from clients from Tuesday to avoid any penalty.

On Monday, the Securities and Exchange Board of India (Sebi) officials met brokers and other intermediaries, according to people in the know. They hinted there wouldn’t be any further extension of the deadline for implementing the new framework.

Sources said industry participants voiced their concern with the market regulator on challenges in implementing the new framework.

 

 

“We are not sure if the depository system is robust to handle the large volumes of re-pledging that would be required to shift to the new system,” said a senior executive of a broking house.

“Functioning of the new system requires complete inter-linkage of client data between the clearing corporation and the exchanges. Brokers expressed their concern that such an inter-linkage is not yet in place for several clients,” he added.

The new margin framework is being introduced by Sebi to check the misuse of client securities through power of attorney (PoA).

In the new pledge system, the stocks don’t leave the investor’s demat account and instead a pledge is marked in the broker’s favour. 

The broker is required to open a separate demat account labelled ‘TMCM – Client Securities Margin Pledge Account’. The broker then re-pledges these securities in favour of the Clearing Corporation and obtains margins.

Sebi had earlier given a deadline of June 30 for complete migration to the new framework. However, following the outbreak of the coronavirus (Covid-19) pandemic, the regulator had extended the deadline till July 31, and subsequently till August 31.

Following the Karvy-episode, Sebi has been tightening norms for the broking industry.

Sebi also proposed intra-day monitoring of margin collection from clients, which would make it difficult for brokers to give relaxation to clients on their margin requirements.

Karvy Stock Broking is currently under probe for its role in allegedly misusing client securities with various lenders to raise funds.

Experts feel the changes in the regulatory framework can lead to further consolidation in broking. 

This is because smaller players may not be able to migrate to the tighter rules and regulations and hold onto their client base.