Sebi gives directions on margin collection and reporting in cash segment

Markets regulator Sebi on Tuesday said trading and clearing members should compulsorily collect upfront certain margins from their clients in the cash segment.

The watchdog has issued a circular on 'Collection and reporting of margins by Trading Member (TM) /Clearing Member (CM) in Cash Segment' and certain provisions would come into force from January 1, 2020, and the rest from April 1, 2020.

"Henceforth, like in derivatives segment, the TMs/CMs in cash segment are also required to mandatorily collect upfront VaR margins and ELM from their clients," it said.

TMs and CMs would have time till 'T+2' (trading day plus two) working days to collect margins from their clients. The requirement would not be applicable for VaR (Value at Risk) margin and ELM (Extreme Loss Margin).

Clients must ensure that the VaR margins and ELM are paid in advance of trade and other margins are paid as soon as margin calls are made by the stock exchanges, TMs or CMs.

"The period of T+2 days has been allowed to TMs/CMs to collect margin from clients taking into account the practical difficulties often faced by them only for the purpose of levy of penalty and it should not be construed that clients have been allowed 2 days to pay margin due from them," Sebi said.

TMs and CMs would be exempted from collecting upfront margins from the institutional investors carrying out business transactions and in cases where early pay-in of securities is made by the clients.

"If the TM/CM had collected adequate initial margins from the client to cover the potential losses over time till pay-in, he need not collect MTM (Mark to Market) from the client," it added.

Like in derivatives segments, TMs and CMs have to report to stock exchange about the actual short-collection or non-collection of all margins from clients.

These requirements would come into effect from January 1, 2020.

A penalty structure would also be in place to deal with instances of short-collection or non-collection of margins as well as for false or incorrect reporting of margin collection from the clients by TMs and CMs.

"For short-collection/ non-collection of client margins, the stock exchanges shall take the disciplinary action... for false/ incorrect reporting of margin collection from the clients by TMs/CMs, the stock exchanges shall take disciplinary action...," the regulator said.

This would come into force from April 1, 2020.

According to Sebi, the circular pertains to VaR, ELM, MTM, delivery, special/ additional or any other margin that has to be collected from the clients.