Stock brokers are expecting the new regulations on client-level segregation and monitoring of collateral to be further pushed to April 2022.
The mechanism with regard to monitoring of segregated funds and other collateral in cash and derivatives segment at the client level and allowing the same to be deployed simultaneously in various segments on a real time basis was not fully operational by the clearing corporations (CCs), a source told BusinessLine. The trading and margin systems of the brokers and CCs should be seamlessly connected for smooth functioning of the markets and clients should be allowed to switch their margin from cash to derivatives segment and vice-versa without any glitch.
Upfront margin for trading in both cash and derivatives is now compulsory. In November last year, market regulator SEBI had delayed the implementation of the new regulations till the end of February on the basis of representations received, mainly from stock brokers.
However, brokers say that SEBI is unlikely to delay its implementation beyond April. One of the other reasons for the same is that the incumbent chairman, Ajay Tyagi, is trying hard to win another extension for his term and he did not want any market disruptions, sources said. In the past, the clearing house and depository participants have faced severe issues and disruptions during trading hours when SEBI implemented the upfront margin collection norms.
A trading member (TM) and clearing member (CM) have to report disaggregated information (segment-wise and asset type-wise break-up) of each client collateral. CM should maintain at least 50 per cent of the total collateral in the form of cash or cash equivalents with CCs.
At the individual client level, a client can have allocation of cash equivalent, less than the value of non-cash collateral provided by the client. The minimum 50 per cent cash equivalent collateral requirement will not be applied at the client level. CMs should have the systems in place to change the allocation of collateral deposited with the CC, subject to the value allocated to any client not exceeding the value of actual collateral received from that client.
For long, the CC of stock exchanges, which settled the trades, identified all the margin collected as that of the TM or CM, which is a broker even if it belonged to clients. The CCs now have to maintain a client-wise account of collateral deposited with them.
Billions of dollars are lying with the CCs as client collateral in terms of cash, bank deposits, shares and other financial instruments. But there was no segregation of this collateral with regard to each trader or investor with the CC. Only the broker had the data on the margin provided by each client.