• Mon. Jun 17th, 2024

Cash Margins : Segregation Circular Update

BySandip Raichura

Jul 21, 2022
Cash Margins : Segregation Circular Update


In our previous blog in October, we had kept our readers updated on the impact of the Segregation Circular (Re Read article below)- Especially the requirement for cash margins and the 90% rule – both of which went live on May 2, 2022. So whats been up since then?

SEBI Circular on Segregation & Monitoring : The Impact

Brokers – Varying Hues!

Whats changed? Earlier, you could park Rs 100 of shares and get limits easily – as even though the broker /CM had to keep 50% in this case, this was met easily by someone else’s cash buying your ticket to trade– without the broker putting cash upfront. Now this changes – to allow you to get a limit against your Rs 100, either you or the broker has to put Rs 50 as cash / cash equivalent at the exchange upfront without which you cannot get a limit (other peoples cash is out of equation).  Since you may not put this up, the broker now has to borrow more to fund your account – even if you dont trade, the broker has to borrow assuming at some stage you may want to trade! and therefore the cost increases substantially. Read this article to know more https://economictimes.indiatimes.com/markets/bonds/brokers-tap-bonds-as-margin-rules-kick-in/articleshow/91300617.cms

Since the implementation of the cash margin requirement rule, a lot of brokers have adopted a different range of practises – Some not charging initially, some charging the full DPC rate and some not giving limits beyond what the clients cash margin can accomodate. We at PL have put a rate of 14.5% on such shortages as our cost of funding now goes up substantially and the client can save on such costs by bringing in cash or cash equivalent to meet at least 50% of the margin deposited. The other rule of 90% also stays as is currently – and there too brokers have used different practises depending on their size and financial strength.

Luckily, there was another problem – that of penalties on shortfalls by exchanges – which has been postponed to July 2022 to give brokers time to stabilise as otherwise the costs may have been much higher and the confusion even more!

The Other Option 

The other option that individual HNI traders have to save some money in the above scenario is to appoint a Custodian for their FNO trading. The Custodian will ensure that your margin is always made available at the required rate of 50% and may charge a small fee for doing this – typically between 3% to 4% on this cash margin funded versus the 14.5% we charge.

Private Banks like ICICI Bank, Yes Bank and even clearing houses offer these services to large clients – typically with margins in range of Rs 50 cr and upwards – and the documentation is fairly easy – typically consisting of a sanction/offer , signing of a CP agreement and the opening of a current bank account – which results in the opening of a CP code which will be used by the broker at the time of entry of such trades in their trading terminals. The post trade settlement is then taken over by the Custodian thus relieving broker of meeting margin / cash margin requirements of such clients.

However, this is for disciplined clients only as such arrangements – though at lower cost- remove flexibility including

  1. Your mark to market losses have to be paid up before 830 am the next day as the clearing participant cannot fund such losses and in case you dont pay up, the agency may put you on squareup mode on the same day irrespective of your margin available.
  2. To avoid such situations, you need to typically deposit at least 20% of your margin (varies between custodians) as cash so that M2M losses are manageable mostly from existing deposits
  3. If you want to sell shares from your holdings, you need to ensure that such shares are not being utilised as margin – else the Clearing agency will not allow any sales.
  4. Finally, you can use only approved stocks as the agency will not fund unapproved shares or in transit shares / funds etc for sudden trading requirements.

For large disciplined investors, this move to a CP code is ideal while for others who either need flexibility , funding via broker may make more sense


Our guess is as good as anyone elses’ but the writer does have a hypthesis – a) There may be a relaxation at some stage on the 90% rule (it simply doesnt make sense to not allow clients to utilise their margin fully and penalising brokers for allowing usage above 90%) and b) all brokers would sooner or later have to start charging as no one has unlimited capital.

We are sure the regulator will also have to watch carefully on the implications of its rule on small brokers – while integrity of infrastructure as well as stability is fine, no rule should allow a clear win of the big over the small – and therefore look at some kind of modifications to the 50% rule as well. For example, instead of demanding cash upfront, maybe the regulators could see if non cash collateral consisting of Nifty stocks could be used – maybe at higher haircuts – or bring in size based differentiation where smaller clients could be allowed to trade without this condition and so on. To stop misutilisation of client funds, a lot is already being done in terms of reporting so some minor tweaks could help relax the pressure on the industry and stop it from becoming a large broker dominated industry ( we assume thats not the intent) and allow a free market for innovation and enterprise.

Either way, the fact is this rule or its variations will bring a lot of discipline amongst the market infrastructure providers and make India one of the safest capital markets in the world. And all of us – as participants in the India growth story – should be proud that we have possibly now one of the most stable governance systems for capital markets in the world and we all are contributing to make it so!

Keep reading this space for more!





Image and article originally from www.plindia.com. Read the original article here.