The new margin regime will be positive for equity markets
When the NSE and BSE start trading on August 01, we could see the first step of ushering in 100% upfront margins to be collected by brokers. The difference will be that effective August 2020 brokers will have to collect 100% cash margins upfront. Penalties will be imposed in phases starting from Dec-20 and extend all the way to Aug-21 when full penalty on short margins will kick in for brokers. But what exactly is this issue of upfront margins in cash equity trading and why does it matter to volumes?
Upfront margins in equity
Currently, when traders put F&O trades, the brokers are mandated to collect (SPAN + exposure margins) upfront. This will now be extended to the cash segment too. Effective, August 01, the brokers will have to collect (VAR + ELM) margins for all cash market trades, both on the long and short side. Here is why it matters. Currently, if the (VAR+ELM) is 20% for RIL, then technically the leverage for intraday trading is 5 times. However, for specific orders like cover orders, bracket orders and other MIS orders, the leverage can go as high as 15-20 times also.
Effective August 2020, brokers have to stick to this rule of collecting full margins upfront and only giving that much leverage. Brokers will have 4 months to adapt and from Dec-20, the penalties will set in phases. This rule will not only apply to buy trades but also to sell trades where margins have to be in cash or early stock pay-in.
Impact on intraday trading
In India, it is estimated that nearly Rs.30,000 crore every day is generated through intraday trading with additional leverage. This is the speculative volume that could get hit. Currently, brokers are allowed to collect minimum 40% for MIS trades and 25% for CO trades. Effective from August 01, all cash market and F&O trades, even for intraday purpose will require the full 100% margin to be collected. Many traders have warned that this could herald the end of the traders in the market, who provide the liquidity in stocks. Intraday volumes could fall sharply and tepid liquidity will also deepen the risk in delivery trading. This regulation does not leave any grey areas in margin collection and reduces everything to black and white. So, the scope for discretion that brokers had, will not exist any longer.
How deep could be the impact?
Traders must prepare for short term disruption of market volumes. However, in the long run, it should be positive. For example, any technology or process shift has only improved the capital markets. From banning Badla to ending the open outcry system to introducing STT to client levels margins and online trading; every shift has been met with suspicion. However, each of these shifts only ended up making the markets deeper, wider, robust and stronger. It should happen this time around too!
