Till now, brokers allowed trading clients to use pledged shares as collateral to initiate trades. Though clients were always required to bring in 50% of their total collateral in cash, brokers never enforced it. This is because exchanges’ clearing corporations recognized margin requirements at the broker level, allowing firms to use cash from one client to make up for the deficiencies of others in its margin pool. The regulator felt that the arrangement of allowing the use of idle cash of one client to make up for the short-fall of others despite taking shares as collateral posed systemic risks, prompting it to tighten rules.
From Monday, clearing corporations must maintain separate margin accounts for every client of brokers. This makes it necessary for clients to bring in 50% cash as collateral to initiate trades. This means, if the margin required for a trade is Rs1 lakh, she must bring in Rs50,000.
Brokers can however fund the 50% cash collateral requirement, which clients need to bring, from its own capital.
“The new Sebi rule is clear that if you (broker) want to fund a client, do that with your own money; not with another client’s money,” said the chief executive of a leading broking firm, who did not want to be identified.
Broking officials said the race will now be on the basis of which firm is able to offer better funding to larger clients.
“Some brokers will charge interest for funding the cash collateral, which essentially raises the cost of trading,” said B Gopkumar, MD and CEO, Axis Securities. Axis will not charge interest on cash margins, he said.
Zerodha, the country’s largest broker, said in its website that it would charge 0.035% per day or 12.5% per annum on the “shortfall in the cash margin requirement”. Various other large brokerages are believed to have informed clients that they will charge interest if 50% cash margins are not met.
Top broking executives said this rule could force firms to cough up more capital to service clients. The top official at another bank-owned broking firm said the cost of capital for brokers could go up by 18-25%. That would intensify the battle for market share in the ultra-competitive domestic broking industry, which works on low brokerage rates and wafer-thin margins.
“While the rule will be a big boost to the transparency levels in the industry, this will squeeze out some of the smaller brokers,” said Gopkumar.
Some smaller broking firms may however be tempted to stick to the old margin rules a bit longer as the penalty for not complying with the new rules will be imposed from July 1, said industry officials.
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