Caution: SEBI's new rules will come into effect from August 1, find out what will affect traders!

- New rules applicable, including upfront margin consolidation, shares as margin
- Many responsibilities will increase: How much vigilance do brokers-clients have to be aware of?

Mumbai, 28

With the new rules to be enacted by the Securities and Exchange Board of India (SEBI) coming into force from August 1, 2020, small and medium-sized brokers are likely to die. Considering the need to implement these new rules very carefully, Here is a detailed description of how much and how much vigilance clients and brokers will need to be, otherwise how much penalty-penalty can be imposed.

Two major changes have been introduced in the new rules of SEBI. Previously, if a trader wanted to use his shares for margin, he only had to give a power of attorney (POA) to the broker. But now, from August 1, the trader will be required to place a pledge on the securities-stock broker to use his stock-securities as a margin.

Another change is that upfront margin consolidation is being introduced in equity segments such as derivatives, which will require investors to provide margins before delivery trades. Which will be implemented with the concept of T + 2 days system, in which the client will have to pay the full investment amount within two days of making the trade-deal.

It may be mentioned that SEBI has issued a new circular dated July 20, 2020 for market intermediaries which are engaged in the implementation of these two major changes and have prepared a framework for verification of upfront aggregation of margins from clients on intraday trading. Currently upfront margins are deposited in the exchanges by the broker for intra-day trading. However the investor level only checks the availability of margins in net positions after the exchange market closes. For example, if a trader buys and sells 1000 shares of Reliance in a single day, it is not necessary to collect a margin from the trader whose net quantity is zero at the end of the day.

The broker collects only 3% of the total trade by providing only 33 times the leverage. If the collected margin is only one per cent, the leverage can go up to 100 times. Some full service brokers offer unlimited leverage by collecting margins after T + 2 days. So that the client is using extraordinary leverage and the losses are exceeding their ability to pay. As a result, brokers default and other clients are affected. So a provision has been introduced with these new rules for the protection of investors in such a situation.

Brokers cannot set their own margins in their own way and will have to collect peak margins as per the VAR + ELM margins set by the exchanges. This will make it difficult for full-service brokers to offer additional margins to their clients. It is estimated that an additional 30 to 35 per cent of the intra-day turnover on exchanges is leased. Now if full margin is required it is possible that the total turnover will be reduced by 20 per cent.

Leverage is a double-edged sword. After 100 per cent return on your investment, your portfolio will be zero with 100 per cent loss. Traders assume that high profits can be made using leverage. So higher leverage also increases the likelihood of capital erosion. The increase in margins will reduce intra-day leverage and help traders to survive longer in volatile markets. So that the upfront margin will now become mandatory and margin penalties will be levied by the exchanges in the event of failure to pay it. So the trader will need to have extra balance with the broker. A good alternative would be online payment transfer. Most discount brokers offer the option of payment through net banking through a payment gateway.

An increase in margins will also reduce the return on capital. This is likely to reduce speculative activity in the market and also reduce the depth in the market along with liquidity. All of these full-service-full-service brokers cannot provide additional leverage so a higher percentage of brokerage-brokerage payments would not make sense and traders are likely to start shifting to discount brokers. So that even brokers will not be able to compete more on margins and they will be forced to turn to brokers who provide better service. The implementation of the provisions of this circular will start in phases from December 1, 2020 and its full effect will be seen from September 1, 2021.