Brokers impose higher trading margins to withstand election volatility

India's benchmark equity indexes hit record highs on Monday after exit polls over the weekend predicted a landslide victory for PM Modi

Some large Indian brokerage firms have asked clients to furnish higher margins against trades this week to limit the risk of default ahead of the results of India's national elections, due on Tuesday.
 

India's benchmark equity indexes hit record highs on Monday after exit polls over the weekend predicted a landslide victory for Narendra Modi's Bharatiya Janata Party. The volatility index fell 19.5 per cent after hitting its highest since June 2022 last week.
 

Following a directive from exchanges to exercise caution, at least five brokerage firms sent out email advisories over the weekend, imposing additional margin requirements - the amount or security an investor must pay to a stock broker before executing a trade to avoid defaults in case of losses.
 

Reuters has reviewed these communications.
 

IIFL securities will impose a 5 per cent additional margin on each stock between June 1 to June 6, it said in an email to clients on Saturday, while Nuvama said it will impose an additional 5 per cent on shares bought with borrowed funds across products in the cash segment starting June 3.
 

Nuvama is also applying an additional margin of 3 per cent on all derivatives trades, with a further "2 per cent (absolute) margin on index derivatives and 3 per cent (absolute) on stock derivatives".
 

A spokesperson for Motilal Oswal Financial Services said they increased margins without specifying how much, while Prabhudas Liladher is seeking margins for derivative trades 10 per cent above the minimum requirement.
 

HDFC Securities told clients in an advisory last week that intraday trades would attract a minimum margin of 40 per cent for June 4.
 

Indian stock indices have seen sharp swings when election outcomes of voting have veered away from expectations.
 

The Nifty 50 fell 12.24 per cent on the day of the election results in 2004, when the Congress and its allies had won after exit polls predicted a comfortable win for the BJP-led alliance.
 

India's largest brokerage firm Zerodha, however, hasn't changed its leverage requirements as they are already reasonable, according to the firm's assessment. "We'll change this if we see volatility beyond what we already expect," a Zerodha spokesperson said.
 

Discount broking firm Stoxbox said it increased "monitoring of public sector banks for fresh positions" and imposed higher "intraday margins for index derivatives".
 

India's second-largest stock exchange, BSE Ltd, on Friday asked trading members to be extra vigilant and cautious while placing orders for execution on trading systems.
 

An email query sent to the markets regulator regarding market-wide additional measures being taken to limit the impact of volatility was not immediately answered.

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