Margins Throw Arbitrageurs On The Mat

Mumbai, Nov 14: | Updated: Nov 15 2003, 05:30am hrs
The gross exposure margins slapped on select brokers by the authorities of the National Stock Exchange (NSE) took a heavy toll on arbitrageurs over the last two days. Arbitrageurs have made the most of the current bull run by taking advantage of the increasing price difference between the cash market and the derivatives segment of the bourse.

The impact of the margins not only wiped off 140 points from the bellwether 30-share Sensex of The Stock Exchange, Mumbai (BSE) over the last two days, but also led to open positions on NSEs derivatives segment dwindling to Rs 8,896 crore, compared to about Rs 12,000 crore a few days ago.

On Friday, the Sensex dipped another 83.33 points to close at 4,865.83 points.

The slapping of gross exposure margins has narrowed the difference between the stock price in the futures market and the underlying cash market price substantially.

The average premium between the two markets has now come down to about 2-3 per cent as compared to 12-15 per cent a few days ago.

However, with the slapping of gross exposure margins, the total average margin on select brokers (inclusive of additonal margin, volatility margin, exposure margin) has jumped to 70 per cent as against about 40 per cent a few days back.

On Wednesday, as a precautionary measure, select clearing members sent letters to the trading members in regard to the imposition of ad hoc additional margins.A letter from UTI Bank (clearing member) to select brokers (trading member) states:...we (UTI Bank) are advised by National Securities Clearing Corporation Ltd (NSCCL) that they (NSCCL) would start levying an ad hoc additional margin on the trading members positions, with effect from November 13, 2003.

The letter said this amount will be payable by the members on November 14, 2003, in the morning, and has to be made in the following manner: cash to the extent of 10 per cent of the total ad hoc additional margin and fixed deposit for the remaining 90 per cent of the ad hoc additional margin.

Further, the letter from UTI Bank said advised trading members to take note of this and also take appropriate steps to meet the ad hoc additional margin requirements of the exchange.

Said Dinkar Shanbhag, chief dealer at brokerage CM Securities: In the last few days, we have stopped our arbitrage activities, on apprehension of additional margins.

If a brokerage is slapped with the ad hoc additional margins, then, for every overdraft facility of Rs one lakh, we can do arbitrage for just about Rs 50,000. Which means, I will pay interest on Rs one lakh to the bank, and earn arbitrage for Rs 50,000, as the remaining Rs 50,000 will be used as margin money, Mr Shanbhag explained.

Market sources said NSE has also called select brokers and asked for additional gross exposure margins. The additional margins were slapped on the basis of five to six parameters, market sources added.

A derivatives dealer at broking house Refco-Sify said: Slapping of gross exposure margins had a ripple effect on the market.