Sebi comes out with guideline to verify upfront collection of margins

Markets regulator Sebi on Monday released framework to enable verification of upfront collection of margins from clients in cash and derivatives segments.

The new framework will come into effect from December 1, 2020, the Securities and Exchange Board of India (Sebi) said in a circular.

The regulator has reiterated that the applicable upfront margins will be collected from the clients in advance of the trade.

Sebi said clearing corporations will send minimum four snapshots of client wise margin requirement to the trading member (TM) or clearing member (CM) for them to know the intra-day margin requirement per client in each segment.

It further said number of times snapshots need to be sent in a day may be decided by the respective clearing corporation depending on market timings subject to a minimum of four snapshots in a day. The snapshots would be randomly taken in pre-defined time windows.

For commodity derivatives segment, Sebi said last snapshot for commodity derivatives will be generated at 5 PM.

The client wise margin file provided by the clearing corporations to trading or clearing member will contain the end of the day (EOD) margin requirements of the client as well as the peak margin requirement of the client, across each of the intra-day snapshots.

The member will have to report the margin collected from each client, as at EOD and peak margin collected during the day, in a manner prescribed by the regulator.

EOD margin obligation of the client will be compared with the respective client margin available with the TM/CM at EOD and peak margin obligation of the client, across the snapshots, will be compared with the respective client's peak margin available with the TM/CM during the day.

With regard to penalty, Sebi said higher of the shortfall in collection of the margin obligations at the two prescribed manner will be considered for levying of fine.

The verification of the availability of margins with TM/ CM will be done by exchanges or clearing corporations on a weekly basis by verification of the balances in the books or of the TM/ CM in respect of the client.

Sebi said peak margin obligation of client across snapshots will be adopted in a phased manner starting from December 1, 2020 and full adoption will happen by September 1, 2021.

For three months from the date of implementation, Sebi said 25 percent of peak margin obligation of the client across the snapshots will be compared with respective client peak margin available with the TM/CM during the day. This will be 50 percent for subsequent three months and thereafter 75 percent for subsequent three months and finally 100 percent.

It, further, said shortfall in collection of margins will be calculated by taking into consideration the phased adoption of peak margin obligation of the client.

During the period of phased adoption, brokers will have to ensure that the funded component is out of their funds and not clients funds.

Jimeet Modi, Founder and CEO of Samco Group said, "This was expected since last year after December 2019 circular. Now, the industry and exchanges will need to adjust to this new reality. This probably will also accelerate the market share towards discount brokers from full-service brokers".

Differentiated margins was a service offering by full-service brokers which has now been arbitraged away, he added.

He, further, said penalty to be based on higher of peak margin reported during the day based on snapshot files or end of day margin (current practice). This practically means, no more intra-day leverage.

In a separate circular, Sebi said it has modified the eligibility criteria for selection of underlying commodity futures for options on commodity futures.

The regulator has decided to do away with the requirement of "the underlying 'Futures contracts' on the corresponding commodity shall be amongst the top five futures contracts in terms of total trading turnover value of previous 12 months".

The decision has been taken on the basis of representations received from stock exchanges and stakeholders.