A new set of rules on margin trading came into effect on 1, September 2020 aiming to bring transparency and prevent misuse of clients’ shares by brokers. SEBI had come out with the norms in February and was scheduled to come into effect from June 1,2020. It was extended to August 1 and thereafter to September 1. Most brokers are opposing SEBI’s new rule on margin — an initial security amount usually collected upfront by brokers for trading in the derivatives segment as it involves highly leveraged and speculative bets.
The new margin trading Rule :
- If a client A is buying shares, then the client A would have to pay an upfront cash margin or pledge shares to cover the margin. The same applied to the sale of shares unless done as part of early pay-in.
- Earlier, a client would give a power of attorney (authorization) to the broker to use the client’s existing shareholdings to access margin for derivative trades. This led to some brokers pooling securities across clients, using one client’s assets as margin collateral for another client who was likely short of funds.
- The new margin rules are an extension of those changes that take away the need for separate accounts with the broker and mandates that the client’s trades be carried out directly with the Clearing Corporation from his/her own Demat account.
- It requires clients to pledge some of their shares, and use those as collateral to make trades in the market. It also brings in stricter regulations to minimize the risk of fraud.
Changes under the new rule :
- A trade can be carried out only against pledged shares or cash. Moreover, these shares have to be present in the client’s demat account and cannot be with the broker.
- The client needs to authorize individual pledge requests using a one-time-passwords sent to them by the clearing corporation, to ensure transparency. The stockbroker will re-pledge the shares with the clearing corporation for margin benefit.
- The pledged shares will remain in the client’s demat account, marked so.
- A client has to wait for a transaction to get settled (T+2 days) before using the proceeds from it, unlike before when the notional proceeds could be used as margin for a new trade instantly.
- Intraday profit can also not be used to enter new trades.
- Sale proceeds from holdings can be used to take new positions only after early pay-in.
- The process of pledging shares can take between 3 hours to a full working day. So brokers advise that those trading frequently should pledge all their shares so as to enable future trades easily.
- If a client pledges shares partially, he will only get the benefit of it in a day or so, which could lead to missed opportunities. The only danger to this is if a client exceeds leverage, the broker has the right to sell the pledged share to recover the lost money.
- The exchanges provide a standard list of approved companies whose shares can be pledged as collateral (usually these shares with high liquidity), but as prudent practice, brokers often apply their filters.
Every broker will have the different system in place to do this, but below are the general steps:
Step 1: Generate a request to pledge available securities using your broker’s system. This is most likely to be in the demat section of your account.
Step 2: You will receive an email/SMS from the depository (CDSL or NSDL) to authenticate that request. Follow the link in the mail to approve that.
Step 3: The link will take you to your depository page. Verify all details. You might be asked to provide PAN or an OTP to approve the request.
Step 4: If approved successfully, your stocks will be pledged with your broker who in turn will place a repledge request with the clearing corporation.
All buy and sell transactions do require payment of margin, except in the case of transactions via early pay-in. Earlier brokers gave longstanding clients the leeway to pay the margin amount by the end of the day but that is no longer acceptable. Margin has to be paid upfront for purchase and sale transactions. Otherwise, the broker and client are liable to be penalized.
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