SEBI's New Margin Norms Looks Similar to Crypto Margin Trading Rules; Could Prove Disastrous For Brokers

The Association of National Exchanges Members of India (Anmi) comprising of 900 stockbrokers across the country have urged the SEBI to extend the deadline by at least another month citing several challenges that the market has been facing. However, SEBI has refused to grant any other extension for the implementation of new Margin Rules.

What are the new Norms for Margin Pledge and Repledge (MPR)?

The new norms of the MPR say, "investors, who are willing to provide shares as margins for trading, will now have to pledge a portion of their holdings in favour of the brokers with depositories — Central Depository Services or National Securities Depository (NSDL)."

Earlier, the investors either used to transfer their shares to the broker's account or used to give power of attorney to the brokers to avail the required leverage for margin trading. With the implementation of the new pledge, the investor won't have to send their shares and they can enjoy all the cooperate benefits on their shares.

The new norms would require a confirmation from the investor for creating a margin pledge instead of giving a power of attorney to the broker. The investor would be required to detail the amount of leverage they want the stock they want the leverage for, which would be forwarded by the broker to the NSDL or CDSL. The mentioned bodies would then confirm the same by sending an OTP to the investor's number and once approved, collateral margins will be provided against the pledged stock.

Traditional Securities Entering into Hot Waters

The new norms are aimed at preventing potential misuse of investor's security to borrow money by brokers, however, many experts believe the new norms could potentially marginalise small brokers in the business and even prove to be disastrous for retail investors.

Jitendra Panda, head of the business strategy at Yes Securities Ltd. commented on the enforcement of new norms and explained how the new MPR norms could prove fatal for small brokers. He said,

"A small trader having a broker account with one broker but the Demat account with another outfit, say a bank, will have to first transfer the shares to the account of the broker before making the trade. Alternatively, the trader must deposit the margins upfront. But for a lot of small traders, who may have some shares but not the capital for margins, making large sales or purchases simultaneously.

The main difference between the initial norms and the new norms would be the way brokers handled margin calls, where earlier the power of attorney granted to the brokers allowed them to trade their client's security with freedom and ease. With the new norms in place, the Demat account is thrown out of the picture and investors would be required to pay their margin calls upfront to trade in the cash market. The earlier system did not require the traders to pay full margin call upfront.

The new system would require the traders to pay 20% of the leveraged trade upfront, and brokers would have to bear the burnt in case any issue arises in the reporting of the margin.

SEBI's New Norms Mimic Crypto Margin Trading

The new MPR norms also look quite similar to the methodologies adopted by various crypto exchanges offering margin trading. The exchange requires traders to commit a portion of the trade capital to the financer in order to minimize the loss. For example, a trader looking to make a 10:1 leverage on a $100,000 trade would be required to commit $10,000 of their own capital. In case the leveraged trade drops below the margin offered by the investor in their account, the trader would be required to put more money in their margin account, and if they fail to do so, the trade is liquidated.

Similarly, the new MPR norms would require investors to bring in upfront margins for selling their stocks or for making any purchases and the securities in their Demat account would no longer serve as the margin for the trade. In the current system, the broker is responsible to fulfil the margin gap in case their client defaults, however, the Association of National Exchanges Members of India (Anmi) pointed out that the main reason that the regulator is offering for the change is norms is invalid given in the past 25-years of electronic trading, there hasn't been any serious case of default from the investors.

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