Bourses may be allowed to raise bank funds for margin trading

Sujoy Manna

Mumbai, Aug 24: THE Securities and Exchange Board of India (Sebi) is likely to consider the issue of stock exchanges borrowing funds and lending the same to brokers so as to facilitate participation in margin trading activities currently being debated among market participants and the markets regulator.

If cleared, this would make available short-term finance to the brokers and help the latter in giving the much-required boost to the sluggish participation in the cash segment.

This recommendation was, therefore, put forward by one of the members of the risk management committee of Sebi on the idea of making available some short-term financing mechanism like margin trading to the member-brokers. Under this arrangement, the exchange would take upon itself the risk of borrowing the funds from banks and forwarding on its own risk to the members, albeit on the basis of strict risk management practice and criteria.

According to sources, the sub-group on the risk management committee for equity market headed by Professor JR Varma is likely to consider the issue. The risk management committee has mooted the idea of introducing margin trading in the stock market after the ban of badla so as to ensure short-term liquidity to the investors.

However, the main point of contention is how would brokers get access to the bank funds. After the recent stock market scam, banks have become extra cautious about their investments in the stock market — including funding to the brokers — and are in no mood to take any fresh exposures in the stock market.
On the other hand, after the ban on all deferral products including badla by the capital markets regulator, the liquidity in the market has dried up.

This has impacted the exchanges’ volumes and turnover.
Thus, an alternative in the form of exchanges borrowing funds from the banks and lending these to the brokers has been proposed as an arrangement for short-term liquidity.

However, sources feel, before such a financing mechanism is introduced, there are a number issues that need to be sorted out. One, a proper risk management system has to be in place so as to ensure the risk of default is mitigated.

Second, the issue of lending and borrowing of funds come under the purview of Reserve Bank of India (RBI), which is a issue that needs greater attention.

Meanwhile, the sub-group on risk management is also likely to consider issues relating to VaR (Value at Risk) calculation, applicability and collection of margins. The sub-committee is also of the view of introducing stock futures.

The committee felt that a streamlined stock lending and borrowing system and segregated short-selling facility to institutional participants, would facilitate stock futures.