Funding costs for traders and brokers are set to skyrocket with tighter margin rules from the Securities and Exchange Board of India (Sebi) coming into effect from May.
Traders must bring at least 50% of their futures and options margin requirements in cash starting Monday, while brokers cannot use one client's money on another client's margin requirement to meet their requirement. These measures are likely to increase brokers' capital requirements and could make them more expensive for traders.
Previously, brokers allowed traders to use pledged shares as collateral to initiate trades. Although clients have always been required to deposit 50% of their total collateral in cash, brokers have never enforced this. In fact, exchange clearing firms have recognized broker-level margin requirements for trading that allow firms to use one client's cash to fill gaps in another's margin pool.
Sebi said the deal, which allows one customer's idle money to be used to meet the deficits of others, poses systemic risks despite taking inventory as collateral, prompting him to tighten the rules. Starting Monday, clearinghouses will be required to maintain separate margin accounts for each brokerage client. This requires customers to provide 50% cash as collateral to initiate transactions. This means that if the margin required for a trade is Rs 1 lakh, you will need to generate Rs 50,000.
However, brokers can fund the 50 percent cash collateral requirement that clients must post with their own capital. "Sebi's new rule is clear: if you (broker) want to finance a client, do it with your own money, not with another client's money," said the managing director of a large brokerage firm. Broker reps said the race will now be about which company can offer larger clients better financing.
"Some brokers charge interest on cash collateral, which significantly increases trading costs," said B. Gopkumar, MD and CEO of Axis Securities. Axis will not charge interest on cash margins, it said.
Zerodha, the country's largest broker, said on its website that it would charge 0.035% per day or 12.5% per year for "falling short of cash margin requirements." Several other major brokerage firms have reportedly warned their clients that they will charge interest if 50% of cash margins are exceeded.
Broker executives said the rule could force firms to allocate more capital to serve customers. The senior official at another bank's own brokerage firm said the cost of capital for brokers could rise by 18-25%. It would intensify the battle for market share in the highly competitive domestic brokerage industry, which operates with low brokerage fees and razor-thin margins.
"While the rule will significantly increase the level of transparency in the industry, it will crowd out some of the smaller brokers," Gopkumar said. However, some smaller brokers may be tempted to stick with the old margin rules a little longer as the penalty for non-compliance with the new rules begins July 1, industry broker officials said.
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