Securities and Exchange Board of India (SEBI) has introduced new norms which can leave some with a bitter taste and some with a hope that the market is strengthening itself. It is a story that has been in motion since last year but the new peak margin rules have intensified the debate whether it is helping the market participants or not. Let’s dig in deep and understand how this mandatory compliance requirement will alter the broking industry.
The new Peak Margins
If you are a regular trader who has a margin account, you will be aware of the margin trading facility (MTF) issued by the brokers. Whenever you are involved in trading, the broker you are using provides you with some borrowed funds. This leverage is given to help you trade higher quantities. The asset which is traded becomes the collateral for the loan from the broker. This margin or loan or funds loaned out by the broker are settled later when traders square-off positions.
Earlier the margin was calculated based on the end of the day (EOD) value. Now, SEBI has brought in some alterations in this margin trading process. The brokers will need to take a minimum of four random snapshots on the day of all margins. The margin which is the highest of these four will be called the peak margin.
From June 1, 2021, they have hiked the upfront margin requirement to 75% from 50% of this peak margin. This is the third phase of the increase in margin requirements.
Earlier from March 1, 2021, it was increased to 50% from the previous 25%. After three months, 1st September 2021, this upfront margin will shoot up to 100%!
With the arrival of a new set of rules, market participants will no longer be allowed to use shares lying in their Demat accounts to make margin payments. The only way this can happen if the account holder pledges his shares with his / her broker. A formal client authorisation process has to be initiated to do this. A one-time password (OTP) will be sent to the holder’s email ID and phone through which this authorisation can be obtained.
How will it impact us?
Brokerages will be forced to work on their toes and report margin details multiple times during a trading session. This is because the margins will be calculated during the session as well, as explained by the peak margin concept. The new set of rules might demotivate the people who trade in stock options or futures. These are important hedging instruments for market participants and not being able to use them conveniently might leave them unhappy.
Zerodha and other brokers have already reduced leverage for intraday positions. This will reduce further in the coming months.
The most severe effect of this will be seen on the trading volumes. They are bound to go down these days as people stay away or trade less due to the higher margins. However, SEBI has held their stance firmly that the higher limit on the margins will curb speculative trading which has increased since last year. They believe that this will bolster the market by making it more transparent for everyone. A stock market is a place that needs new rules and the general belief is that the traders will get used to the new system and low volumes.
Commodity Participants Association of India (CPAI) is the association of participants in commodity exchanges and commodity derivative segments. They have held a virtual meeting with SEBI and requested them to continue with the previous level of 50% peak margins. According to the Association of National Exchange Members of India (ANMI), the rate of overnight margins is almost 300% more than what is required to keep the system safe and secure.
The Way Ahead
Offering higher leverage was one of the mechanisms through which brokers were enticing the traders to join them. They used to offer higher leverage with which the traders can trade. Now, they have a strict limit to what they can provide. This will discourage the traders who were heavily relying on the borrowed funds. This will eventually mean that you will be required to put in more capital if you want to make the same number of trades you did previously.
The major downside to this is, more participants will enter the F&O market for quick returns as leverage reduces. This will actually increase speculation in the market and make it easier for beginners to lose capital. Isn’t this exactly the opposite of what SEBI is trying to do?
Are you facing problems with these new rules? Do you feel it will solidify our trading system or will it negatively affect retail traders like you and us? Let us know about your experience in the comments section of the marketfeed app.