Anmi urges Sebi to dispense with peak margin concept

By: |
November 12, 2020 4:50 PM

In a letter to the watchdog, Anmi said the very concept of peak margin will have a domino effect on the business models of the brokers and the exchanges. It, further, said the move will have severe unintended consequences for the smooth functioning of markets thriving on leverage, liquidity and offshore participations.

He noted that Sebi's move is a pro-active one to regularise leverage, reduce systemic risk, and avoid a potential settlement crisis.He noted that Sebi's move is a pro-active one to regularise leverage, reduce systemic risk, and avoid a potential settlement crisis.

Stock brokers’ association Anmi has requested markets regulator Sebi to dispense with the concept of peak margin, which is to come into force in a phased manner from December 1. The new rule is aimed at preventing brokerages from giving additional leverage to traders.

In a letter to the watchdog, Anmi said the very concept of peak margin will have a domino effect on the business models of the brokers and the exchanges. It, further, said the move will have severe unintended consequences for the smooth functioning of markets thriving on leverage, liquidity and offshore participations.

According to an estimate, almost 90 per cent of the turnover at the exchanges comprise intra-day business.
“By indirectly not allowing brokers to provide intra-day leverage to their clients from their own capital through the mechanism of peak margin is unjust,” the brokers’ association said in the letter written last week.

Anmi urged Sebi to “dispense with the concept of peak margins especially when brokers are ready to fund the intra-day margin requirements of their clients from their own capital and who at the same time exercise prudent risk management practices when they offer such intraday leverage to their clients”.

The Association of National Exchanges Members of India (Anmi) is a grouping of over 900 stock brokers across the country. Tejas Khoday, CEO of FYERS — a technology-focused stock broking platform — said the new margin rules to prevent brokerages from giving additional leverage to traders is a game-changing move by Sebi.

“The power to create disproportionally large positions compared to the funds available with brokers exposed the entire ecosystem to potentially disastrous systemic risks,” he added. He noted that Sebi’s move is a pro-active one to regularise leverage, reduce systemic risk, and avoid a potential settlement crisis.

“While reducing leverage is certainly going to impact liquidity and volumes in the medium term, it will strengthen the ecosystem and prevent defaults, misappropriation of funds, etc. If we have to mature as a market, hard steps will have to be welcomed,” Khoday said.

Under the concept of peak margin reporting, a clearing corporation is required to inform traders and investors at least four times a day about their margin requirements. The present system does not require such updates. Further, brokers believe that clients will need to maintain a lot more margin to initiate intra-day trading if the new rule is implemented.

The peak margin obligation of client across snapshots will be adopted in a phased manner starting from December 1. From December 1, a trader is required to have 25 per cent of peak margin in her/ his account. This will be 50 per cent from March 1 and thereafter 75 per cent for subsequent three months and finally 100 per cent from September 1, 2021.

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