Brokers-traders rejoice: SEBI leans in market interest

- SEBI understands problem of brokers-market intermediaries: No penalty for one month on upfront margin short collection: New framework to be implemented from September 1, 2020

(Commercial Representative) Mumbai, Ta. 31 July 2020, Friday

The Securities and Exchange Board of India (SEBI), the regulatory body for capital markets, has finally sided with the market. SEBI, which has earlier decided to enact legislation that would have killed many brokers and made it effective from August 1, 2020, has had to relax the rules in the interest of brokers, traders and market intermediaries, with a decision not to impose stricter penalty norms. SEBI has decided not to impose any penalty immediately in case of reduction or under-collection of upfront margin aggregation.

In a circular issued today, SEBI has decided not to impose penalty for one month for any future deviation in upfront margin consolidation, which will provide some relief to stockbrokers and traders. In addition, SEBI has clarified in the circular that if brokers collect a minimum of 50 per cent upfront margin, they will not be penalized for outstanding debentures or non-collected margins. This relaxed framework will be implemented from September 1, 2020. SEBI has said that if the trading member / clearing member collects a minimum of 50 per cent margin of VAR (Value at Risk) and ELM (Extreme Loss Margin) from the customer, no penalty will be levied for the outstanding margin collected or not collected.

However, SEBI has clarified that the clearing corporation will continue to collect upfront margins from trading or clearing members on VAR and ELM. Trading members or clearing members will have trading plus two days (T + 2 days) working days to collect margins from their clients. Trading members and clearing members are exempted from collecting upfront margins for business transactions transacted by institutional investors and from collecting upfront margins by clients in cases where advance securities have been paid-in.

SEBI's decision will come as a huge relief to today's buyers and tomorrow's sellers (BTST) traders, with most brokers typically raising a margin of up to 50 per cent. Earlier in November 2016, the Securities and Exchange Board of India (Sebi) had decided to make it mandatory for trading members and brokers in the cash segment to collect upfront advance margins from customers from August 1 to reduce speculative trading and excess liquidity. It was decided to levy a hefty penalty for the less collected margin for non-collectors. Which has now been relieved.

Meanwhile, in a separate circular, the National Stock Exchange (NSE) said that securities lying in a trading member's account would be treated as margin for a sale transaction. This will also remove the restrictions on the amount received from the sale of shares on the trading day. In case of sale of shares by the customer in which the advance has been accepted by the Pay-in Clearing Corporation (CC), the member will be able to credit the sale value of the shares to the customer's ledger account. Which can be calculated as a margin for the next customer's trade.

SEBI and stock exchanges were frequently approached by various market intermediaries, brokers regarding upfront margins. There was a great danger that the new rules of SEBI would have an adverse effect on the market, after the introduction of which SEBI finally decided today to relax these rules and regulations, which was welcomed by brokers and traders.