NSE eases margin requirements

NSE extends T+0 facility to members in case of MTM trigger and lets go of scale-up margin

Stock brokers and clearing members might get some relief in margin payment to the National Stock Exchange (NSE), in case their mark-to-market (MTM) gets triggered after a major market crash. The NSE has introduced a T+0 (Today) settlement scheme for its members allowing them to pay the margin on the next day of trading, at 8:30 am, before the market opens. This will save them around 20-25 per cent on scale-up margin requirements in case MTM gets triggered.

MTM is triggered during a sharp fall in the price of a security when the initial margin collected by the exchange is not sufficient to make good the crash in price. In such cases, clearing members of NSE are supposed to deposit their margins before 10:30 am but along with 25 per cent extra or scale-up margin. NSE now says if margin payment is done before the market opening, such a scale-up margin might not be required.  The margin paid after the market opens on the next day of trading is considered a T+1 settlement.

Most stock brokers struggle to make up for margin requirements of exchanges after any major market crash, and the scale-up margin in such a scenario only adds to the chaos. Often, this also results in a fall in market depth as brokers impose self-trading curbs when volatility is high following a crash. For instance, the combined derivative trading volumes on NSE and the Bombay Stock Exchange (BSE) on February 28 crossed Rs 4 lakh crore for the first time on the derivative expiry day. However, the volumes fell sharply to just over Rs 1 lakh crore the very next day, as benchmark indices fell over two per cent on the previous day, with the Union Budget deemed to be below market expectations. Such instances could give large traders an advantage to play markets on a day when volumes are thin.

Also, exchanges are known to collect MTM margin on the same day in the evening, when there is a major crash or brokers’ terminals are deactivated the next day. According to stock brokers, the new facility could give them some breathing space, as 20-25 per cent margin is a huge sum in bad times. The recent plunge in mid- and small-cap stocks had made it tedious for stock brokers to deposit scale-up margins on a regular basis.

According to NSE officials, the facility of T+0 has been made available as the exchange has seen a significant scale-up in their trading and risk management technology in the past few years. Both NSE and BSE follow real-time risk management.

The World Federation of Exchanges has ranked NSE as the top derivative exchange in terms of contracts traded last year, ahead of the New York Stock Exchange, Euronext and Nasdaq OMX of the US and the Korea and Shanghai exchanges. Data from the World Federation of Exchanges showed about 735 million contracts were traded on NSE from January to June 2012.