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New margin norms are bad news for traditional brokers

By Ashley Coutinho and Samie Modak
September 07, 2020 08:55 IST
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Market players said the new norms were more suited for online brokers, where clients were typically internet savvy.

The Securities and Exchange Board of India’s (Sebi’s) new margin norms may hit traditional brokers harder than the new-age discount brokers or those that cater to institutional clients.

Market players said the new norms were more suited for online brokers, where clients were typically internet savvy.

 

For an offline broker, the client either visits the branch or places orders through the telephone.

Creating a pledge, however, requires authentication on the depository website.

“The client now has to give the OTP to the broker over the phone to create a margin pledge.

"This defeats the purpose of the new system and also creates a lot of back and forth between client and broker.

"So ideally the client has to go to the branch and trade there,” said an industry player, who estimates that 30-40 per cent of retail trades still take place on the phone.

Industry players said brokers had squared off and moved to the new margin system for the cash market.

However, there are a lot of open positions in futures and options (F&O) where margin has been provided through collateral accounts through power of attorney (POA).

“For F&O, if the client doesn’t confirm the pledge in his account, how will the broker transfer the stock from the collateral account to the client’s account?

"Sebi should have given time till the expiry of the contracts as the positions would have expired and got automatically squared off,” said a broker.

Market players are now lobbying the regulator to allow brokers to obtain a PoA digitally.

“Smaller or regional high-risk broking will suffer. However, this also means opportunities for national brokers like us who are investing in technology and advice.

"It’s a big step forward in the longer term for the industry and will leave collateral damage as any transition does.

"Common margining means more value to be provided to clients as well as makes broking safer,” added Sandip Raichura, chief executive officer, retail, Prabhudas Lilladher.

Industry players say the new norms had thrown into disarray the market infrastructure, which included the exchanges, depositories, and clearing corporations.

On Friday, CDSL, ICCL, and NSE Clearing and NSDL issued a joint statement saying that a significant amount of margin pledges/re-pledges had seamlessly been processed since September 1 and the new margin pledge process was expected to stabilise in the coming week.

Separately, the exchanges deferred the levy of penalty for client margin shortfall, non-collection, and reporting in the cash and derivatives segments to September 15, citing system congestion owing to the large number of client securities being pledged.

Industry players said brokers would wait till September 15 for futures and options (F&O) clients to provide margins under the new system, and if they fail to do so, they will square off outstanding positions.

Monthly F&O contracts expire on the last Thursday of every month. Dhiraj Relli, managing director and chief executive officer, HDFC Securities, said more than offline versus discount brokerage, it was more between players who provided extra leverage vis-a-vis who did not.

"With respect to margining, it had reduced leverage in the system.

"Hence, brokers who offered a more leverage-basis relationship may stand at a disadvantage, since it now does not allow them to provide more leverage and has restrictions on it,” he said.

Brokers will have to do away with intra-day margin trading products in a phased manner starting December.

By August next year, they will be restricted from taking any additional leverage in intra-day trading.

“The change won’t impact discount brokers much because they have standardised processes already.

"The traditional broker’s USP was this additional margin, which it provided its ‘elite’ customers but this no longer exists.

"Clients will have to maintain a higher margin in their account to continue trading intra-day, which translates into lower return on investment for some,” said Arshad Fahoum, chief product officer, Market Pulse.

Photograph: PTI Photo

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Ashley Coutinho and Samie Modak in Mumbai
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