23rd February 2024

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Stock market new margin norms

On September 1, the stock markets put in place a transparent and strict mechanism to collect an initial 20% margin on cash market transactions and resisted the collateral system to protect the interests of investors.

  • Although the new rules, which had been postponed twice previously, created some initial problems, such as fixed margins and payment delays, the situation should return to normal within a few days.

What is the 20% margin charge?

  • Market regulator Sebi has so far had no margin requirement for transactions in the spot market, but clients will now have to pay 20% of the cost of the shares and this will apply to both buying and selling of titles.
  • Client margins are only required in the futures and options segment until last year and no cash margin was required from clients. It has been adjusted by the runners.
  • While Sebi has tightened margin rules due to the misuse of securities by unscrupulous industry brokers, the new rules have created new challenges for brokers. Investors must pay 20% the same day and the balance the next day.

How will this affect the pledge system?

  • Investors have lost millions of rupees in the unauthorized pledge of shares by Karvy. Karvy's problem forced the regulator to adjust the pledging system.
  • The unauthorized pooling system and manipulation by brokers using Client Power of Attorney (PoA) will now end. They used to withdraw money from clients' accounts and adjust to the needs of other clients.
  • Sebi's rules state that a client can pledge securities with a trading member, who in turn will similarly engage with the clearing member.
  • The Clearing Member will pledge it to Clearing Corporation (CC). At the same time, the shares will remain in the customer's demat account and the full tracking of the pledging process will be recorded on the customer's demat account.
  • Investors who trade using existing stocks as collateral in the demat account can now relax.
  • However, brokers encountered problems arranging spreads for investors who offered their shares, which delayed settlement in the first three days.

What was the reaction of the runners?

  • Brokers obviously wanted the regulator to suspend both the imposition of 20% margins on spot market transactions and the implementation of the new collateral rules.
  • This is because they need to update their systems and illegal “tweaking” with customer money has also been stopped. The runners hope to return to normal within the next two weeks.

Will this make the markets more transparent and secure?

  • Charging an initial 20% margin contributed to the orderly movement of stock markets which have seen excessive speculation in recent months.
  • Tightening the collateral system will make investors' money more secure and lead to more transparency and less manipulation.
  • Every significant transition signals a new beginning and the hope for better results. Hopefully a more secure and transparent equity trading ecosystem. Barring initial implementation issues, once the system is in place, we hope it will provide a win-win situation for all stakeholders.
  • In fact, it can be the basis for the growth of financial markets and their efficient functioning.
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