SEBI Changes Guidelines And Now Clients Need to Pay Margin Upfront

The existing margin rule for intraday trading is going to change from December 1, 2020. The Securities and Exchange Board of India on Monday confirmed that from now onwards, traders and investors will have to maintain upfront margin in their account to receive leverage from brokers. The new upfront collection of margins guidelines by SEBI pave the way for upfront margin verification that will intimate the traders several times in a day to meet their margin requirements.

What Is The Margin?

Margin is a concept that allows brokers to extend loans to clients against cash or securities or any form of liquid assets in their margin account to invest in the market. This helps traders and investors to leverage, that is to place a larger bet than the cash available in their account. It is also called loan against investment.

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Till now, clients needed to meet margin requirements in their account once at the end of the day. But, the new margin rules of SEBI will require them to fulfil their margin obligations at the beginning of the deal.

What Will Change?

Margin is calculated based on the total exposure of a client in the market. It is the total of value at risk (VAR) and extreme loss margin (ELM). The exchange calculates margin requirement on market volatility, which changes many times during the day.  Some trading members have argued that the new rule will prevent brokers from extending margin beyond the value of upfront margin.

SEBI is trying to clear the air surrounding margin requirements by bringing in more straightforward rules. Earlier, some small brokers were indulging in a practice of using margin made by one client for another. One such incident came to light in 2019 after which SEBI wanted to put forth stricter regulation to stop the practice of the inter-client margining system.

From December 1, the clearing corporation (a part of the stock exchange) will send at least four intimations a day client-wise to meet intraday trading margin requirements. They are going to call it peak margin reporting.

According to market experts, the new rule will significantly limit intraday trading activities, which contributes almost 90 percent of the volume in the exchange. Some participants said it means ‘no more intraday leverage.’

Currently, a total of 30 to 35 percent of intraday trading turnover depends on the additional margin extended by the broker. But under the new rule, clients will have to maintain a higher margin in their accounts to receive the same leverage amount as before. Under the new directive, no broker will be able to extend any higher-margin limit than prescribed. If the broker fails to collect, or the client fails to pay the required margin within t+1 (for derivatives) and t+2 (for equities and commodities), Clearing Corporations will impose a penalty as it deems fit.

Conclusion

New margin rules of SEBI aims at achieving two feats with one stroke. Firstly, it will safeguard thousands of retail brokers who fail to manage margin leverage effectively. And secondly, it will prevent the brokers from using a margin of one client to offer leverage to another.  SEBI has taken the step after several incidents of client funds misuses were reported to it.