Mumbai: The Securities and Exchange Board of India (SEBI) says its move to margin institutional trades in the cash market on a T+1 basis from April 21 is to create a level playing field.
Subsequently, with effect from June 16, 2008, the collection of margins would move to an upfront basis.
“But upfront margin will also spawn front-running because it is a de facto disclosure of buy or sell orders. Foreign institutional investors will not be comfortable about this, and it can increase volatility,” said Gaurav Dua, head, research of broking house Sharekhan.
The move is altruistic in principle as it is aimed at creating safeguards to avoid a payment crisis such as the one seen in January.
And institutions anyway keep the money with their custodian. “Earlier the custodian would enjoy the float. Now they will have to make the early pay-in,” points out a fund manager who does not wish to be named.
Manish Sonthalia, equity strategist at Motilal Oswal, sees it as an attempt by SEBI to ensure a level playing field.
“Earlier, only retail investors needed to pay the margins. Now with the institutional short-selling being introduced, the regulator wants a level-playing field. There could be some procedural difficulties, but the principle is good for the market in the long run,” Sonthalia said.
Some observers said life would certainly turn difficult for brokers, as their ability to finance trades may be reduced considerably.
According to risk management procedures prescribed by SEBI, brokers are required to deposit sufficient liquid assets with the exchange to cover upfront value at risk or VaR margins, extreme loss margin, MTM (mark to market losses) and the prescribed basic minimum capital or BMC.
Any shortage in these funds would reduce the member’s gross exposure limit (the maximum exposure a trading member is allowed) proportionately.
Hitherto, institutional trades handled by brokers were not considered for calculating the margin requirements. Now with the new circular this would also be considered, which will substantially increase the margin requirements.
R Balakrishnan, executive director, Centrum Stock Broking, said one area where more clarity is needed is the exposure limits of brokers.
“At present, the institutional trades are exempted from the calculation of the margin requirement and capital adequacy calculations of the brokers. If institutional trades are included for these calculations many small brokers will need to raise fresh capital to meet their statutory requirements. This will lead to consolidation in the industry,” he said.
The dice is certainly loaded against brokers: they’d have to ensure bank guarantees, and make other provisions which may be required as the rule gets implemented.
Banks are not very forthcoming when lending to brokerages since they do not enjoy an “industry” status and are perceived to be a high risk business.
Another problem is the archaic banking system in which a cheque deposited by a client takes three days clear. “The stock exchange does not wait for that long. It demands immediate pay-ins,” says a sub-broker.
Subsequently, with effect from June 16, 2008, the collection of margins would move to an upfront basis.
“But upfront margin will also spawn front-running because it is a de facto disclosure of buy or sell orders. Foreign institutional investors will not be comfortable about this, and it can increase volatility,” said Gaurav Dua, head, research of broking house Sharekhan.
The move is altruistic in principle as it is aimed at creating safeguards to avoid a payment crisis such as the one seen in January.
And institutions anyway keep the money with their custodian. “Earlier the custodian would enjoy the float. Now they will have to make the early pay-in,” points out a fund manager who does not wish to be named.
Manish Sonthalia, equity strategist at Motilal Oswal, sees it as an attempt by SEBI to ensure a level playing field.
“Earlier, only retail investors needed to pay the margins. Now with the institutional short-selling being introduced, the regulator wants a level-playing field. There could be some procedural difficulties, but the principle is good for the market in the long run,” Sonthalia said.
Some observers said life would certainly turn difficult for brokers, as their ability to finance trades may be reduced considerably.
According to risk management procedures prescribed by SEBI, brokers are required to deposit sufficient liquid assets with the exchange to cover upfront value at risk or VaR margins, extreme loss margin, MTM (mark to market losses) and the prescribed basic minimum capital or BMC.
Any shortage in these funds would reduce the member’s gross exposure limit (the maximum exposure a trading member is allowed) proportionately.
Hitherto, institutional trades handled by brokers were not considered for calculating the margin requirements. Now with the new circular this would also be considered, which will substantially increase the margin requirements.
R Balakrishnan, executive director, Centrum Stock Broking, said one area where more clarity is needed is the exposure limits of brokers.
“At present, the institutional trades are exempted from the calculation of the margin requirement and capital adequacy calculations of the brokers. If institutional trades are included for these calculations many small brokers will need to raise fresh capital to meet their statutory requirements. This will lead to consolidation in the industry,” he said.
The dice is certainly loaded against brokers: they’d have to ensure bank guarantees, and make other provisions which may be required as the rule gets implemented.
Banks are not very forthcoming when lending to brokerages since they do not enjoy an “industry” status and are perceived to be a high risk business.
Another problem is the archaic banking system in which a cheque deposited by a client takes three days clear. “The stock exchange does not wait for that long. It demands immediate pay-ins,” says a sub-broker.
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