Will Upfront Margins Hurt Investors?

No. But it turns the heat on brokers and intra-day traders in derivatives

- Lokeshwarri SK

There was a buzz created recently following the fresh guidelines on margin collections and reporting by stockbrokers in the cash segment.

These rules, released on December 31, 2019, were perceived adversary by many stockbrokers, who approached the Securities and Exchanges Board of India (SEBI) to review the rules. But the regulator has not yet agreed to backtrack on this.

The rules are primarily intended at the cash segment, since the need to deposit upfront margins is already prevalent in the derivative segment.

But the new guidelines have caused problems for intra-day traders in the derivatives segment as well.

Such traders were so far allowed to trade without depositing upfront VaR (Value at Risk) and ELM (Extreme Loss Margin) by brokers since the margin status was being reported only towards the end of the day.

With the need for upfront margins for intra-day derivative trades, many traders are likely to be affected.

The impact on the cash segment is, however, likely to be limited since most traders use futures and options for intra-day trades.

The change

The guideline, issued by NSE, follows a directive issued by the SEBI on November 19, 2019.

The regulator has been worried that brokers are not collecting adequate [a] margin from clients.

Besides, the recent Karvy episode lA has brought to the fore the issue of mismanagement of client securities and funds by some brokers.

The SEBI circular seeks to tighten the rules governing collection of trading margins from clients in the cash segment and imposes penalties on brokers; clearing members for not following the rules.