How Sebi’s margin rule changed the equation for average traders?

Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which becomes the collateral for the loan from the broker. Traders are allowed to buy stocks by paying a marginal amount of the actual value.

Margin trading can be considered as leveraging positions by traders in the market either with cash or security. The margin can be settled later when traders square off positions.

In order to avail the margin trading facility (MTF), traders need to have a margin account with the broker. The margin varies across brokerages. Traders need to pay a certain sum (minimum) at the time of opening the MTF account. At the same time, they are required to maintain a minimum balance at all times. An interest rate is charged by the broker on the amount funded. In case he fails to maintain the minimum balance, his trade gets squared off.

Sebi has brought some changes in the margin trading process. Earlier regulations necessitated the maintenance of an upfront margin at the beginning of the trade. Exchanges are now being asked to collect maximum margin from clients based on intraday checks in contrast with the end-of-day monitoring being done previously.

From March 1, 2021, Sebi has hiked the upfront margin requirement to 50 per cent from 25 per cent, and this has impacted trading volumes. In the next two phases, Sebi plans to take this limit to 75 per cent by the end of August and then 100 per cent by September.

From September 1, the upfront margin requirement will double from current levels, and this has the potential of further denting trading volumes. Sebi is making stockbrokers to not only calculate margins based on the end-of-the-day position, but also on intraday peak position, which is likely to put an end to leveraging, though in a phased manner.

Now, the question that comes to mind is that how is it going to impact traders? The new framework will impact an active trader to some extent.

However, under the ‘Peak Margin’ framework, brokerages have to report margin details multiple times during a trading session, because the margin requirement would be computed during the session and any price fluctuation would impact the quantum of margin available for fresh transactions.

On the flip side, this new Sebi norms are likely to bring greater transparency, and at the same time, strengthen the market and work in the interest of traders. In simpler words, the new framework is likely to strengthen the overall safety of the market.

Going by past experiences, the system should adopt to the new system in some time. In the past, such new frameworks used to impact trading volumes and frequency in the initial days, but traders would eventually get used to the new system and volumes would return to normal levels over time.

(DK Aggarwal is the CMD of SMC Investment and Advisors)

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