Intraday, arbitrage trades in cash segment may reduce after Sebi's verification of upfront margin, penalty

Markets regulator SEBI on Monday released framework to enable verification of upfront collection of margins from clients in cash and derivatives segments. The new framework will come into effect from December 1, 2020, the Securities and Exchange Board of India (SEBI) said in a circular. The regulator has reiterated that the applicable upfront margins will be collected from the clients in advance of the trade. SEBI said clearing corporations will send minimum four snapshots of client wise margin requirement to trading member (TM) or clearing member (CM) for them to know the intra-day margin requirement per client in each segment. It further said number of times snapshots need to be sent in a day may be decided by the respective clearing corporation depending on market timings subject to a minimum of four snapshots in a day. The snapshots would be randomly taken in pre-defined time windows. For commodity derivatives segment, SEBI said last snapshot for commodity derivatives will be generated at 5 PM. The client wise margin file provided by the clearing corporations to trading or clearing member will contain the end of the day (EOD) margin requirements of the client as well as the peak margin requirement of the client, across each of the intra-day snapshots. The member will have to report the margin collected from each client, as at EOD and peak margin collected during the day, in a manner prescribed by the regulator. EOD margin obligation of the client will be compared with the respective client margin available with the TM/CM at EOD and peak margin obligation of the client, across the snapshots, will be compared with respective client peak margin available with the TM/CM during the day. "Brokers won't be able to offer intraday margins beyond VAR+ELM (Value at Risk and Extreme Loss Margin). This could result in huge reduction in intraday turnover which is almost 90% of all turnover. This is because if excess intraday margin provided could result in margin penalty," Jimeet Modi, Founder and CEO, Samco Group said. "Our estimate is that almost 30-35% of the intraday turnover is based on additional leverage provided by brokers. Now assuming full margin is required, Total turnover would shrink by approximately 20% (since balance part margin was still being collected from clients)," he added. Rudra Shares and Stock Brokers also said it would hit intraday as well as arbitrage traders as the maximum turnover in cash segment is from intraday trades. "It is already implemented in the derivative segment, now the Sebi will gradually implement in cash segment as well with effect from December 1, 2020 and from September 1, 2021, it will get fully implemented," he added. With regard to penalty, SEBI said higher of the shortfall in collection of the margin obligations at the two prescribed manner will be considered for levying of fine. The verification of availability of margins with TM/ CM will be done by exchanges or clearing corporations on a weekly basis by verification of the balances in the books or of the TM/ CM in respect of the client. "Now the industry and exchanges will need to adjust to this new reality. This probably will also accelerate the market share towards discount brokers like Samco Securities from full service brokers," Jimeet Modi said. "Differentiated margins was a service offering by full service brokers which has now been arbitraged away. Interesting times ahead!," he added. SEBI said peak margin obligation of client across snapshots will be adopted in a phased manner. For three months from the date of implementation, SEBI said 25% of peak margin obligation of the client across the snapshots will be compared with respective client peak margin available with the TM/CM during the day. This will be 50% for subsequent three months and thereafter75% for subsequent three months and finally 100%. It further said shortfall in collection of margins will be calculated by taking into consideration the phased adoption of peak margin obligation of client. During the period of phased adoption, the member should be able to demonstrate that the balance peak margin obligation has been funded from the member's own funds and not from any other client. In a separate circular, SEBI said it has modified the eligibility criteria for selection of underlying commodity futures for options on commodity futures. The regulator has decided to do away with the requirement of "the underlying 'Futures contracts' on the corresponding commodity shall be amongst the top five futures contracts in terms of total trading turnover value of previous 12 months". The decision has been taken on the basis of representations received from stock exchanges and stakeholders. (With inputs from PTI.)