Market regulator issues guidelines on leveraged intra-day trades

The Securities and Exchange Board of India (Sebi) on Monday issued guidelines for the collection of upfront margins from clients, which the broking community said would put an end to leveraged intra-day trading and make a huge dent in trading turnover.

The regulator has asked brokers to collect upfront so-called value at risk (VaR) margin and extreme loss margin (ELM) even for trading in the equity cash segment. This will be implemented in three phases starting December 2020 where brokers will be penalised if margin client to clients is more than 25 per cent of VAR+ELM. From March 2021 and June 2021 they will be penalised if the margin exceeds 50 per cent and 70 per cent of VAR+ELM, respectively.

From August 2021 onwards, brokers will be penalised if the margin used exceeds VAR+ELM. The broking community said this would put an end to leverage-based intra-day trading which is rampant currently.

Currently, some brokers offer as much as 100 per cent leverage. For instance, stock A has a VAR+ELM of 50, then a broker has to collect Rs 50 for every Rs 100 worth of trade in the stock from August 2021 onwards. Currently, some brokers collect only Re 1 margin for Rs 100 worth of trade.

VAR and ELM is different for different stocks based on factors such as volatility and liquidity.

had proposed to tighten the margin requirements in a circular dated December 2019. However, the industry had raised operational difficulties in collection of upfront margins from clients. Following detailed discussion with the industry players, has decided to tweak the framework and implement in a based manner.

Under the new framework, clearing corporations as been directed to send four snapshots during the day to brokers for identifying the margin requirements for clients.

“Going ahead, brokers won’t be able to offer intraday margins beyond VAR+ELM. This could result in huge reduction in intraday turnover, which is almost 90 per cent of all turnover. Excess intraday margin provided could result in margin penalty,”said Jimeet Modi, Founder & CEO, Samco Group.

Modi said currently about a third of the turnover is due to additional leverage provided by brokers. He said the trading turnover could reduce by up to 20 per cent due to Sebi’s tightening.

Also, during the phased implementation phase, has asked brokers to fund clients using their own funds and not client funds.