Sebi may bring in client margin in cash market

The Securities and Exchange Board of India (Sebi) is discussing a proposal to make it mandatory for brokers to collect margins from clients in the cash market. This is now practised only in the derivative segment.

At present, brokers deposit margins with the exchanges for transactions in the cash segment but cannot force clients to pay the margins. There are two types of margins in the cash market — extreme loss margins and value-at-risk (VAR) margins. The margins deposited by brokers remain blocked till pay-in and pay-out is completed. Exchanges collect margins on both sell and buy transactions and netting is also not allowed. In case of the trade-to-trade segment, the VAR margin is 100 per cent.

Brokers have requested Sebi to make collection of margins from clients mandatory.

Last week, Sebi held a meeting with leading market participants to discuss this issue. The move comes on the back of complaints from brokers, who faced cash crunch on days when clients went short on stocks in the cash market (with an intention to cover their trade before the close of market hours) and the market moved in the opposite direction.

Since clients are not paying margins, brokers get trapped when there is a high volatility.

In the absence of margins, brokers also find it difficult to offset their positions, especially in case of stocks not traded in the futures and options (F&O) market.

For instance, a client goes short on stock A (not in the F&O) priced at Rs 400 and the stock price goes up to Rs 600. At the end of the trading session, the broker will have to square off his position by paying for the stocks from his pocket.

If the broker has not collected any margin because the stock is not in the F&O segment, he has to bear the entire margin. In case of F&O shares, he has the cushion of margins that can offset his losses to some extent.

“During May18- 22, many large brokers lost Rs 15-20 crore each, while small brokers too incurred losses of Rs 7-10 crore each. Some brokers did collect the margin money, hoping that the markets may go up by a maximum of 10 per cent. However, markets went up beyond all expectations,” said sources close to the development.

Market experts said that if margining was made mandatory in the cash market, brokers would have some portion of the obligation in his kitty.

Sebi, in an effort to enhance the use of margin capital by market participants, had brought in cross margining across cash and derivatives markets last year. The facility is available to those cash market positions that have corresponding off-setting positions in the stock futures market.

During days of unprecedented bullishness, traders tend to take full advantage of facilities like super multiple in which a trader can take an exposure of up to 10 times the initial margin for intra-day trading.