SEBI circular on Segregation and Monitoring of Collateral at Client Level

You’ve probably heard much talk about SEBI’s new margin guidelines, recently announced by the Stock Exchange Board of India (SEBI).

After much debate and consultation with stakeholders and several delays, the regulator eventually agreed to move forward with the reform in stages. It will cause a dramatic shift in India’s stock market when it goes into effect on May 2, 2022.

So, what exactly does this new reform entail?

SEBI adopted these new margin regulations to standardize leverage standards, increase transparency and reducing risk at a broker level in the stock market. According to this guideline, the Sebi issued a circular in July 2021 requesting a 50 percent margin requirement from traders in F&O & CD Segment. Traders must put in cash equal to 50% of their equity derivative margin requirements.

How is this rule different from the old rule? 

Brokers formerly enabled trading clients to begin Trading using pledged shares as collateral. Brokers never enforced the requirement that clients bring in 50 percent of all their collateral in cash or cash equivalents. Clearing Corporations for exchanges confirmed margin requirements at the broker level, allowing them to utilize some money from one client to compensate for the margin pool’s deficiencies. The regulator believed that enabling one client’s idle cash to cover the shortfalls of others, despite accepting shares as collateral, presented systemic risks, causing it to tighten guidelines.

This rule might be viewed as a massive structural change in India’s stock market. But why was this needed in the first place?

The objective of this tighter client margin restriction is to lower system risks. This new pledge system will help protect investors’ interests by preventing brokers from exploiting their clients’ assets. 

However, many people have raised concerns about the regulation’s negative aspects. According to them, this can lead to a reduction in market liquidity and possibly upend the market’s core price-discovery mechanism. Many brokers and traders believe that both results might have a big influence on market volumes. 

Since it is set to go into effect, brokers will secure margin from investors by following this rule: 50% equity shares and 50% cash. If investors do not maintain this ratio, they will be liable to interest charges. However, trading in F&O with Astha Trade allows you to invest according to the new rules without incurring any additional interest costs. In reality, Astha Trade will comply with the new SEBI guideline by completing the cash ratio on your behalf.

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