Thread by @amitgupta0310

Unusual and unnecessary confusion regarding the new margin rules in certain segments.

A thread explaining the details as per SEBI notice(s) so far...

In 2019 June, SEBI outlined new margin rules for F&O segment citing that intraday losses and margins need to be paid in advance to the broker. Suitable penalties were imposed.

After postponing once in Aug-19, finally the new F&O rules were implemented from 1st Oct, 2019.

In Nov-19, SEBI has issued a circular and made it compulsory for brokers to collect and report all margins from clients in the cash segment upfront

(just like it was done in F&O segment earlier)

This was supposed to be effective from 1 Jan, 2020 but then again postponed to 1st April (broker requests) and then to 1 June (due to Corona) and then to 1 Aug (More Corona).

So this is NOT a new rule but just a postponed rule which is now getting implemented.

Brokers will have to mandatory collect the 'VAR (value at risk) margin' and ' ELM (extreme loss margin)' upfront from their clients before permitting them to enter any transaction orders in the trading system

Brokers will be required to ensure clients pay up marked to market (M2M) margin and additional margins to the broker as soon as margin calls are made by the clearing corporation or the broker.

This in a way will deter brokers from misusing funds and shares lying in client accounts as they now have to report the short collection or non-collection of margins from clients to stock exchanges.

This will also help the stock exchanges keep a better tab on the client margins front and deter the brokers from meeting a client's margin call from other clients' accounts.

Now comes the penalty part :

A penalty structure would also be in place to deal with instances of short-collection or non-collection of margins as well as for false or incorrect reporting of margin collection from the clients by TMs and CMs

ONLY the penalty portion to brokers has been postponed to Dec 1, 2020. NOT the new margin rules which stays at 1 Aug, 2020 (as of today)

Since SEBI says onus of taking margin from clients is on brokers. So penalty will also be paid by brokers!

This penalty structure will also be done in 4 phases from Dec 2020-Aug 2021 like

Dec 2020- Feb 2021: Penalty if margin used <25% of VAR+ELM
Mar 2021- May 2021: P if M used <50% of VAR+ELM
June 2021- Aug 2021: P if M used <75% of VAR+ELM
Aug 2021 onwards: P if M used < VAR+ELM

Hence, if you do intraday leverage trading in cash segment, you need to pay extra margin for VAR+ELM.

This will impact trading volumes. But at the same time plug in some loopholes which have crept in the system.

IMHO, There are 2 main corollaries to this:

(a) How this will impact traditional brokers vs online brokers and online brokers vs bank-based brokers.

With SEBI planning real time settlement in the years to come, bank based brokers are at a major advantage. More on this, later!

(b) FAQs released by SEBI on Friday has caused some second order issues as margin released on selling can't be used immediately (but on T+2 for cash or T+1 for F&O)

This require clarifications and may be revoked in the coming week. Hopefully!

Extending the thread on queries of pledging:

(a) The process of placing the shares in the margin will change.

(b) The value of shares in a demat account cannot be counted in the credit against the margin.

(c) The value of the shares in the broker's margin account is also not counted in the credit against the margin.

(d) All shares placed in the margin account of the broker till now have to be released & given in the demat of the client.  Then, PLEDGE in favor of the broker.

(e) In doing this PLEDGE, the investor will get OTP SMS from NSDL / CDSL. The process of PLEDGE will be completed only after giving it to the OTP broker and only then the share margin will be credited.