Market liquidity may be hit under new margin rule, warn brokers

K K Maheshwari, President, Association of National Exchanges Members of India (Anmi) told Mint that the new peak margin will certainly have a bearing on trading volumes. He expects that the trading volumes will come down significantly. “We will also witness reduced intraday position in the derivatives segment. Besides, volumes are likely to shift from futures segment to options segment as traders will look to extract better leverage. We will also see conversion of long risk trade to higher risk trade with longer or deeper stop loss,” he said. 

Under the new system securities lying in clients’ demat account cannot be used towards margin payment, instead these need to be pledged with the broker after client authorisation and further re-plegded with clearing corporations and exchanges. The client authorisation is being obtained via one-time password (OTP) and emails. Any shortfall in margin collection also leads to a penalty for clients and trading members.

In a letter to Sebi, the broking industry body had earlier said that the proposed margin is 300% of what should have been the actual levy. Nithin Kamath, founder and CEO, Zerodha, a popular trading platform tweeted, “The dreaded day for brokers, exchanges, intraday traders, is here.” According to Kamath, another inadvertent second-order effect will be that most likely the minimum margin required will have to be higher even than the SPAN (standard portfolio analysis of risk) plus Exposure for F&O positions. “This is because margins for F&O can go up intraday if there’s a sudden spike in volatility. SPAN margin updates 5 times during the day. SPAN Margin is the minimum requisite margins blocked for futures and option writing positions as per the exchange’s mandate,” he added. 

Trading volume on both BSE and NSE, with 449.90 million and 2330.06 million, respectively on Wednesday, did not show much impact. This compares to average volume of 300.45 million and 1027.24 million on BSE and NSE respectively from beginning of January till August. 

According to Deepak Jasani, retail research head, HDFC Securities, higher upfront margin will show an impact on volume when overall trend in stock markets is bearish. “With a widespread optimism, typically investors are willing to trade in stock markets even with higher margin requirement,” he said. 

On Wednesday, markets had opened at record high in early trade but ended lower. The BSE Sensex ended at 57,338.21, down 214.18 points or 0.37%. The Nifty closed at 17,076.25, down 55.95 points or 0.33%. 

Earlier data analysis showed that exchange volumes declined sequentially for cash and commodity segments while equity derivatives rose in June compared to previous month.

“Impact of phase-3 of upfront margin norms (75% margin requirement) was seen in cash and commodity segments, while derivatives volumes witnessed a month-on-month growth,” ICICI Securities had said in a note. 

Meanwhile, Sebi on Wednesday eased the framework pertaining to the time period for introducing liquidity enhancement schemes on securities by stock exchanges. Under the new rule, Sebi said that the stock exchange can introduce liquidity enhancement schemes on any security. Once the scheme is discontinued, the scheme can be re-introduced on the same security.