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Confusion reigns over Sebi margin rule 1.0: There is Version 2.0 too
NEW DELHI: At the same time as confusion reigns over the introduction of margin guidelines within the money phase from September 1 as brokers declare unpreparedness at their stage and that of the depositories, there is one other deadline looming for the business for Margin Norm 2.0. That has to do with adjustments in margin trading in derivatives, the phase that generates greatest volumes on Dalal Avenue .
The tweaks in margin rule for by-product trading will come into power from December 1. Below these guidelines, merchants might be compelled to progressively go in the direction of retaining full margin based mostly on peak positions throughout a day.
Market regulator Sebi says the choice was taken to cut back danger in monetary markets, and curb the observe of extreme leverage. The adjustments will make it troublesome to take a big place, if one doesn’t have sufficient money within the trading account.
ETMarkets did the legwork to try to perceive the problems at hand, and extra importantly, how the upcoming adjustments may have an effect on traders by hook or by crook. The solutions we discovered had been based mostly largely on our discussions with Venu Madhav, Chief of Operations at Zerodha. The primary half handled the whats and whys and the second on penalty provisions. Within the third and closing half, we are attempting to know how the adjustments within the by-product phase are going to have an effect on merchants and brokers. Learn on…
How does margin trading work in futures (by-product) markets?
To know this, let’s take the instance of Nifty futures. As of at this time, to purchase or promote one lot of Nifty futures, you want round Rs 1.5 lakh in your trading account. This is known as exchange-mandated margin required to take a place (taking a place means both shopping for or promoting).
Now, suppose your trading account steadiness is simply Rs 20,000. Theoretically, you shouldn’t be capable of take any place in Nifty futures. In observe, many brokers help you take positions on the situation that you’d sq. off on the finish of the day.
How do brokers permit that?
They both use funds obtainable in different shoppers’ accounts to make up for the shortfall, or take loans. In your case, your shortfall of Rs 1.three lakh (Rs 1,50,000-Rs 20,000) is supplied by your dealer. On the finish of the day, the place is squared off. And, after adjusting for beneficial properties or loss, the dealer will return your money to you.
At the moment, margin reporting is completed on the finish of the day. However since you don’t have any place on the finish of the day, the margin required is zero. This is a win-win recreation for each brokers and merchants, but it surely creates dangers for the monetary system.
“No matter you purchase intraday, it is not checked. Suppose, you had taken a place of Rs 100 crore within the morning, however your place is squared off on the finish of the day, no margin is required. This was recognized as a danger, as brokers at this time give loopy quantities in margins. This places different prospects’ money in danger,” mentioned Venu Madhav, Chief of Operations at Zerodha.
What is the change in rule proposed?
What Sebi is altering is, aside from the end-of-the-day margin test, there may even be a peak margin reporting, that is, what is the best open place of the shopper in a given day. For instance, in a day for those who had purchased 5 plenty of Nifty futures at 11 am and 5 extra at 12 midday earlier than squaring off every thing at three pm, it will likely be checked for those who had Rs 15 lakh (peak margin required for the place) in your account or not. Brokers might be penalised if there is any shortfall. The rule might be applied from Dec 1. This is to discourage the observe of over-leveraging, that creates dangers within the monetary market, mentioned Madhav.
So, would I have to have the total quantity in my account to take a place from Dec 1?
Sure, and no. Ideally, you must, however it might additionally rely in your dealer. Sebi is implementing the margin requirement in a phased method, in order that market contributors get used to the rule. From Dec 1, a dealer must have 25 per cent of peak margin in her account. The quantum might be 50 per cent from March 1, 75 per cent within the subsequent three months and 100 per cent from September 1, 2021.
“Ideally, brokers must do 100 per cent assortment. Sebi is saying you report simply 25 per cent from Dec 1. This time has been given to brokers to streamline their techniques and make it correct sufficient in a 12 months,” mentioned Madhav.