With more volatility, brokers raise margin requirements

Brokers are asking investors to cough up higher margins, as volatility in the market rises sharply. Currently, the average margin requirement they want is about 30 per cent of client exposure, up from 20 per cent earlier.

Broking houses have turned wary in allowing leveraged bets in several small counters, susceptible to sharp corrections. The recent volatility, which has seen stocks fall more than 30 per cent in a single trading session, has triggered the move. “Volatility on the downward side will lead to higher margin requirements. Anyone who has taken leveraged positions in the market will need to bring in higher margins,” said Prasanth Prabhakaran, president, retail broking, IIFL.

Margin requirements are different each for the cash segment, the stock derivatives and index derivatives segment. Cash market margin requirements are about 30 per cent at present. Stock futures see margin requirements as high as 60 per cent, even 90 per cent in some cases, depending on volatility in the scrip.

Margin requirements for Nifty futures is about eight per cent. All margin requirements are regulated by the exchanges, based on daily observations of stock movements. However, some brokers demand margins higher than those stipulated by the exchange, as a safety measure.

“Usually, with increasing volatility, margins will increase and we have seen the percentage go up in the past couple of months. Margins are higher in the stock futures segment than the index futures,” said Dharmeshh Kant, vice president-strategies and fund manager (PMS), IndiaNivesh Securities.

The benchmark indices are down a little more than 10 per cent from their 2015 highs, while several stocks in the small-cap and mid-cap space have dropped a little more than 50 per cent.

Last week, mid-cap and small-cap counters saw sharp sell-off, triggering a large number of margin calls, causing further weakness. Many in the industry believe the volatility is likely to shoot up further, in the absence of any immediate reason for an up-move.

“Volatility in the market will be there until the depth increases. The increased volatility is resulting in fence-sitters remaining skeptical and not increasing exposure, while a few have opted for the mf route. Those who have increased exposure during the past year are primarily those clients who have been active during the pre-election period too," said Rahul Rege, business head, retail, Emkay Global Financial Services.

Over the past year as the markets moved up, many more stocks in the mid-cap and small-cap segment gained entry into the derivatives segment. Stocks in the futures & options segment do not have circuit filters, making these susceptible to higher volatility. As the number of stocks under the F&O category increased, so did retail participation in the segment.

“As long as volatility increases, higher margins will have to be provided,” said Satish Menon, executive director, Geojit BNP Paribas Financial Services.