SEBI puts traders on the margins

SEBI puts traders on the margins

with an unprecedented influx of new investors into the system, SEBI, India’s securities regulator, designated some new rules towards the end of last year. with the aim of protecting retail investors from suffering heavy losses, it began a phase-wise implementation of peak margin rules. 

the rules began to raise upfront margin requirements, beginning with 25% of the trade value and rising in steps of 25%. the 100% requirement kicked in on September 1, leaving many brokers and traders unhappy. let’s see why.

what is margin trading?

let's say you have ₹1,000 to invest in the equity markets. You fancy stock A. fantastic company, good revenue, superstar founder. you want to be a part of it. you decide to buy shares. now, it is trading at ₹100. typically, you can buy 10. but using margin trading, one could take a ‘buy’ or ‘sell’ position for a greater amount. five or ten times the ₹1,000 you have, or even more, depending on how much the brokerage platform offered. for their part, the platforms simply had to clear their dues at the end of the day depending on how much profit/loss was made.

but now things have changed.

why are brokerages upset?

now, 100% of the margin needs to be deposited with the regulator four times every trading session. thus brokers now have to deposit higher amounts out of their own pocket, instead of just the differential amounts at the end of the day. thus the leverage that they can offer becomes significantly lesser.

in the above example, a brokerage could offer 10x margin and only have to pay a fraction of it at the end of the day. but now, it has to deposit the full ₹10,000 in one of the four time slots on the day of the trade. thus, it either has to collect a higher amount from the investor upfront, thereby reducing the margin, or deposit the balance amount out of its own pocket, which becomes impossible on a large scale.

margins are now expected to be capped at 5x, but will still be a bigger strain on the brokerages’ resources. they will now have their money locked up as security. money which they could have used elsewhere for growth.