New F&O norms: Brokers to meet Sebi over intra-day margin restrictions

For now, brokerages are bracing for a dip in trading volumes, given that the curbs on leverage trades - effective from January - are likely to hurt transactions in the F&O segment

Large brokerage houses are set for crunch talks with the Securities and Exchange Board of India (Sebi), seeking clarity on the new norms pertaining to margins that are set to take effect this year.
 
The implications of the same on the market ecosystem, going ahead, will also be a key talking point.
 
According to market sources, the Association of National Exchanges Members of India (Anmi) will meeting the market watchdog and exchange officials on January 8 to understand the new guidelines.
 
For now, brokerages are bracing for a dip in trading volumes, given that the curbs on leverage trades — effective from January — are likely to hurt transactions in the futures and options (F&O) segment, in which leveraged intra-day trades are common.
“
Earlier, there was an ambiguity in the futures and options segment, where margin reporting needed to be done only at the end of the day. However, the new norms require margins to be taken upfront before any trade,” said Nitin Kamath, chief executive officer of Zerodha.
 
“We could especially see the smaller traders in the futures segment get impacted,” Kamath added. 
 
Market sources added that while exchanges have already told brokerage houses that the upfront margins will get inspected on an intra-day basis, brokers will nevertheless discuss the subject with Sebi.
 
According to market participants, a large segment of the industry that faced shortage of funds was able to use this grey area in intra-day reporting to attract retail traders to meet margin requirements in the F&O segment.
 

In a circular on New Year’s eve, the NSE issued a circular clarifying that Sebi's norms on collecting upfront commission would not only be applicable to the cash segment, but also the F&O segment.
 
“In the F&O segment, it is mandatory for trading members to collect initial margin, net buy premium, delivery margin and exposure margin from respective clients on an upfront basis,” NSE said in its circular.
 
According to industry data, the futures segment accounts for 10-15 per cent of the market volume, while the options segment accounts for 80-85 per cent.
 
Most brokerages — both small and large — try to offer additional leverage to clients to facilitate their transactions in the F&O segment.
 
Market participants said that even though the mechanism for intra-day margin reporting is yet to be put in place, exchanges will work on the system to ensure there is proper reporting on this front.
 
In the last few months, Sebi has brought in several norms to tighten the practices in the broking industry. On handling of client securities, Sebi issued a circular stating that brokers were required to ‘unpledge’ any client securities and sell them in the market if the dues were not cleared by the clients.