New margin rules likely to increase the cost of trading

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Mumbai: The cost of funding for traders and brokers is set to shoot up with the Securities and Exchange Board of India’s (Sebi’s) tighter margin rules set to kick in from May.

Traders must bring in at least 50% of their futures and options margin requirement in cash starting Monday, while brokers cannot use the cash of one client for another’s margin requirement to fulfil their margin requirement with bourses. The moves are expected to drive up the capital requirement for brokers and could make it more expensive for traders.

Till now, brokers allowed trading clients to use pledged shares as collateral to initiate trades. Though clients were always required to bring in 50% of their total collateral in cash, brokers never enforced it. This is because exchanges’ clearing corporations recognised margin requirements at the broker level, allowing firms to use cash from one client to make up for the deficiencies of others in its margin pool.

Sebi felt that the arrangement of allowing the use of idle cash of one client to make up for the short-fall of others despite taking shares as collateral posed systemic risks, prompting it to tighten rules. From Monday, clearing corporations must maintain separate margin accounts for every client of brokers. This makes it necessary for clients to bring in 50% cash as collateral to initiate trades. This means, if the margin required for a trade is Rs 1 lakh, she must bring in Rs 50,000.

Brokers can, however, fund the 50% cash collateral requirement, which clients need to bring, from its own capital. “The new Sebi rule is clear that if you (broker) want to fund a client, do that with your own money; not with another client’s money,” said the CEOof a leading broking firm.