Market liquidity could be affected by new margin rule, brokers warn
The Association of National Exchanges Members of India (ANMI), one of the country’s largest brokerage associations, has warned that markets could experience a sharp drop in trading volumes and reduced liquidity in the markets. next few days with Sebi’s initial 100% margin standard going into effect from Wednesday. Sebi’s new mandate in margin trading, which came into effect last year on a phased basis, raised the initial requirement to 100% from Wednesday. Earlier from March 1, 2021, Sebi increased the initial margin requirement from 25% to 50%. The next phase in June raised the limit to 75%.
KK Maheshwari, president of the Indian National Exchanges Members Association (Anmi) told Mint that the new maximum margin will certainly affect trading volumes. He expects transaction volumes to drop significantly. “We will also see a reduction in the intraday position in the derivatives segment. Also, volumes are likely to shift from the futures segment to the options segment as traders will look to extract better leverage. We will also see a conversion of long risk trades to higher risk trades with a longer or deeper stop loss, ”he said.
Under the new system, securities in clients’ mat accounts cannot be used for margin payment, but must be pledged to the broker after the client’s authorization and pledged to banks. clearing companies and stock exchanges. Client authorization is obtained via one-time password (OTP) and emails. Any shortfall in collecting margins also results in a penalty for customers and merchant members.
In a letter to Sebi, the brokerage industry body previously said the proposed margin was 300% of what should have been the actual levy. Nithin Kamath, Founder and CEO of Zerodha, a popular trading platform tweeted: “The dreaded day for brokers, exchanges, intraday traders has arrived. should be even higher than the SPAN (Standard Portfolio Risk Analysis) plus the exposure for the F&O positions. “This is because the margins for M&O can increase during the day if there is a sudden spike in volatility. The SPAN margin is updated 5 times during the day. The SPAN margin is the minimum margins. requirements blocked for futures and options positions in accordance with the mandate of the exchange, ”he added.
The volume of trade on BSE and ESN, with 449.90 million and 2330.06 million respectively on Wednesday, did not show much impact. This compares to the average volume of 300.45 million and 1027.24 million on BSE and ESN respectively from early January to August.
According to Deepak Jasani, head of retail research, HDFC Securities, a higher initial margin will impact volume when the overall stock market trend is down. “With widespread optimism, investors are generally willing to trade in the stock markets even with a higher margin requirement,” he said.
On Wednesday, markets opened at a record high early in the session but ended lower. BSE Sensex finished 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%.
Analysis of past data showed that trading volumes declined sequentially for the cash and commodities segments, while equity derivatives increased in June compared to the previous month.
“The impact of phase 3 of the initial margin standards (75% margin requirement) was observed on the cash and commodities segments, while the derivatives volumes grew monthly,” said ICICI Securities in a note.
At the same time, Sebi on Wednesday relaxed the framework relating to the time limit for the introduction of measures to improve liquidity on securities by the stock exchanges. Under the new rule, Sebi said the exchange can introduce liquidity improvement programs on any stock. Once the plan is interrupted, the plan can be reintroduced in the same way.
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