F&O traders prepare for new margin rules

Mumbai: Individual traders must bring 50% of their equity derivative margin requirements in cash from February 28. This is part of Securities and Exchange Board of India's stricter client margin rules, aimed at reducing risks to the system.

Currently, traders can use the value of the shares pledged with brokers as margins for futures and options trades. In November, Sebi had postponed the implementation of this rule to February 28, 2022, from December 1, 2021. Brokers are now gearing up for the implementation of the new rules.

Some broking firms have already started collecting the additional cash margins. There will be some selling in the market from individual investors before February 28, said brokers.

"Some trading members have already started collecting 50% cash margins. However, many investors have leveraged positions on the F&O segment, and the new rule would hamper their trading activities," said B Gopkumar, MD & CEO, Axis Securities. "Investors may have to trim their open positions to fulfil the margin requirements if they fail to bring funds."

Brokers will be penalised if there is any shortfall in the client's margin requirements. They will also not be able to use one client's money to fund another client.

Markets could see a decline in trading volumes and reduced liquidity in the coming days after the implementation of the new margin norms, said Ashish Chaturmohta, director of research, Sanctum Wealth.

"Over the longer period, it will reduce the volatility in the market and cut the losses in case of an unforeseen event," said Chaturmohta.

According to the new Sebi norms, brokers will have to segregate client funds in different segments like cash, F&O, currency, and commodities and upload the details to clearing corporations. This is aimed at strengthening the protection mechanism of client collateral from misappropriation by the brokers.

Until now, reporting and calculation of margin at brokers were happening at an aggregated level since there was no bifurcation in the funds of clients and brokers.

"Henceforth, the implied fungibility will stop, and brokers won't be able to use one client's credit balance to fund another client," said B Gopkumar of Axis Securities.

KK Maheshwari, president, Association of National Exchanges Members of India (ANMI) said Sebi has also indirectly introduced a capital adequacy ratio (CAR) for brokers at 10% through the new norms as client collateral is not considered above 90%. "This would sound like the death knell for small- and medium-sized brokers which do not have sufficient net worth in proportion to the sum of credit balance of their clients. Earlier brokers would grow their net worth through profits. Now a broker would first have to increase their net worth to support the increase in business," said ANMI in a letter to Sebi early this month.