New system of margin pledging, re-pledging in stock market implemented from today

(Commercial Representative) Mumbai, Ta. 31 August 2020, Monday

The Securities and Exchange Board of India (SEBI), the regulator of the capital market, has decided to implement a new pledge and re-pledge system from September 1, 2020. SEBI has reportedly rejected a request by brokers to postpone the implementation of the new system for a month after depositors CDSL and NSDL said they were ready for the new system. SEBI, after meeting Market Infrastructure Institutions (MIIs), stock exchanges, depositories and clearing corporations today, clarified that the new system will be implemented from September 1, 2020.

SEBI has received feedback from clearing corporations, depositors, professional clearing members (PCMs) and information technology vendors on the implementation of the new pledge and re-pledge system from September 1, 2020. Of course the PCMs demanded a one month deadline extension. The major PCMs include Axis Bank, Edelweiss Securities, ICICI Bank, Kotak Mahindra Bank and Globe Securities.

In today's meeting, all others except Kotak Mahindra Bank said that they had pledged 3% shares last evening. Depositories said all but one of the PCMs have come on board. Brokers complained of delays in pledging and re-pledging of one-time passwords (OTPs). The clearing corporations said the pledge is now at 20 per cent higher than a month ago.

Margin pledging is a means of obtaining a loan through a mortgage of securities. Traders in F&O use pledging to obtain margin funding from brokers. Margin provides investors with leverage, investing in deals without full risk in the first phase. Risk exposure to securities becomes limited when one places a pledge-mortgage.

Brokers and institutions have asked SEBI to postpone the implementation of the new system for a month, saying it still needs more time to prepare the system and cannot implement the new system immediately.

SEBI today-Monday held a meeting with representatives of brokers, exchanges, leading companies and depositories on the matter. Depositories themselves said they were fully prepared to implement the new system, but brokers said their backend system was not fully equipped with more than 5 per cent and asked for a postponement of the new system.

Brokers say they have Rs 12,000 crore in securities clearing members, which need to be returned to brokers, after which customers can make a pledge. Which may not happen overnight, brokers are still considering making further representations to SEBI on the matter. Along with this investors also need to be educated. There are about 1500 brokers. The number of mortgage stocks in the system has crossed one crore in the last few days. SEBI had formulated these new standards in February 2020 and decided to implement them from June 1, 2020.

The deadline was announced to be extended from August 1 and again from September 1, 2020. So that from today, the securities of the customers will not be counted as margins, it will be necessary to make a pledge-mortgage with the securities broker after authorization. SEBI has come up with this new system with the objective of preventing misuse of consumer securities in the wake of the Karvi broking case.

Under the current system, investors do not have to pay any upfront margin as cash margin in the cash segment. Now SEBI is going to implement this margin system in the cash segment as well. In the new pledge and re-pledge system, brokers will have to collect upfront margins from investors for buying and selling both shares. They will be penalized for failing to collect. Securities held in a demat account will be available for automatic margin. The broker will have to report to the exchange along with the margin figures collected from the investors.

Under the new system, the depository will have to give margin pledge to the trading member or clearing member for the mortgage-pledge securities of the customers. In order to give collateral in the form of securities as margin, the customer will be required to place a pledge with his securities-shares trading member. The customer will re-pledge to the clearing member and re-pledge with the clearing corporation.

The brokers, however, demanded that the implementation of the system be postponed as they faced difficulties in equipping their system with the new system. In this new system, the exchanges have to provide the statistics of each customer to the depositories. Brokers say that there are complete errors in the mapping and missing codes and false clearing member IDs. Until last week the figures were reconsidered by the depositories and millions could not be mapped. Pledge-mortgage is not approved due to lack of mapping.

It may be noted here that guidelines for margin pledges were issued by clearing corporations in July. But these depositories took time for brokers to open accounts so that their clients could re-pledge shares. According to one broker, permission to open a margin pledge account was given by the brokers late by the depository. Standard User Acceptance Testing (UAT) was not made available to brokers until the end of July 2020 and even then only a few were provided with this facility. The UAT supply operation is also incomplete and not working. So that SEBI's second deadline of August 1 could not be implemented and a parallel system was suggested.

Market circles say that while Central Depository Services Limited (CDSL) was able to set up the system in a timely manner. While struggling in the National Securities Depository Limited (NSDL), of course it is claiming to be ready from day one. Sources said NSDL was asked by SEBI to hold daily meetings with back-office vendors. Millions of unique client codes (UCCs) have been seeded or corrected in the depository environment in the last two weeks. Eventually NSDL's systems are found to be working.

A member of the Association of National Exchange Members of India (NMI) says that working with Market Infrastructure Institutions (MIIs) is only the first step, with brokers likely to have to go live without time for execution on untested systems.