SEs knock Sebi to set floor on deal size for margin requirements

Sujoy Manna

Mumbai, Aug 28: THE stock exchanges have recommended the Securities and Exchange Board of India (Sebi) for introducing a floor on transaction size of the clients so as to do away with the margin requirements for small size transactions. Accordingly, margins would be collected from clients for transaction size above the floor.

The sub-group on risk management systems for equity market set up by the Sebi under Professor JR Varma is considering the issue, it is learnt.

Currently, and especially in a depressed market, both the number of brokers’ clients and the size of their business tend to be small, making it rather difficult to collect margins, brokers said.

According to sources, representatives from the various stock exchanges have recommended the Sebi to introduce a floor on transaction size. The brokers will thereafter, collect upfront margin from investors only if the transaction size is above the floor.

The SEs feel, the Sebi must waive margin for transaction size less than the floor. This can minimise the procedural hazards involved in dealing with large number of cheques of smaller denominations.

Under present circumstances, if a broker fails to collect the upfront margin from their clients, the broker is penalised for non-compliance.
According to sources, there can be alternatives in the form of brokers collecting an initial deposit from the clients and can give exemption to the clients from paying margins.

Earlier, the group on risk management has proposed for a unique ID for every investor. The Sebi has recently made it mandatory for all brokers to use unique client codes for all clients.

In order that each investor is represented by a unique client ID, it will be mandatory for all brokers to collect and maintain their back office, the permanent account number (PAN) allotted by income tax department for their clients as well as clients of their sub-brokers. The brokers shall be required to furnish the above particulars of their clients to the stock exchanges and clearing corporations at specified intervals. Meanwhile, the group is currently reviewing the implementation of the VaR (value at risk) based margins in the equity markets. The group is to look into issues such as the method for calculations of VaR, applicability and collection of margins.