On July 20, 2020 SEBI issued a circular providing a uniform framework for verification of upfront collection of margins in cash and derivative segments by clearing corporations and stock exchanges (“the Framework”), with a view to monitor the upfront collection of margins by trading members / clearing members from their clients and resolve any operational difficulties arising thereof.
Previously, SEBI had issued a circular dated November 19, 2019, whereby SEBI had mandated upfront collection of margins by trading member / clearing member in the cash segment, in order to streamline the risk management framework in the cash and derivative segments. As per the above circular, trading members / clearing members were required to collect upfront VaR margins and extreme loss margins from their clients, while a timeline of ‘T+2’ working days was allowed to collect other margins such as, market to market margin, delivery margin, special or additional margin, etc.
As per the Framework, the clearing corporations are now required to send a minimum of four snapshots of client wise margin requirements to the trading member/clearing member per day, for them to know the intraday margin requirement per client for each segment. While the number of times such screenshots shall be sent could be decided by the clearing corporation depending on market timings, the snapshots would be randomly taken in predefined time windows.
In case of commodity derivatives, the Framework prescribes that the final snapshot of the margin requirement shall be taken at 5 p.m. and the Risk Parameter File of 5 p.m. shall be applicable on End of Day (“EOD”) portfolio for margin collection from the clients. Further, the Framework also mandates that the client wise margin file provided by the clearing corporations to trading members / clearing members shall contain both the EOD margin requirements as well as the peak margin requirements across the intra-day snapshots.
The trading members / clearing members shall report the margin collected from each client in the manner prescribed under the Framework, i.e. EOD margin obligation compared with client margin available at EOD and peak margin obligation compared to respective client peak margin available with the trading member / clearing member. The verification of availability of margins shall be done by stock exchanges/clearing corporations on a weekly basis through verification of the balances in the books / ledgers of the trading member/ clearing member in respect of the client.
The Framework shall be applicable with effect from December 01, 2020 and a phased timeline for reporting of collection of peak margin is provided, whereby within three, six and nine months from December 01, 2020, 25%, 50% and 75% of the peak margin obligation, respectively, shall be compared with the corresponding peak margin available with client. Thereafter, 100% of the peak margin obligation shall be compared with the peak margin available with client for the purpose of reporting of peak margin collection.
Earlier, through a circular dated February 24, 2020, SEBI had revised the margin framework in cash and derivative segment in consultation with the Risk Management Review Committee. Through the aforesaid circular, the regulator had reviewed the guidelines on VaR margin rates and extreme loss margin for the cash segment and had reviewed volatility calculations, scan range of price as well as volatility, calendar spread charge, stop option minimum charge and extreme loss margin in the derivative segment. A provision for additional margin for highly volatile stocks had also been made.
The above requirement of collection of upfront margins, combined with the revised margin framework, may affect the intraday trades which, to a certain extent rely on the leverage provided by stock brokers. With the introduction of the new framework, the stock brokers will not be able to provide leverage in terms of the VaR or extreme loss margins which may result in a drop in the total intraday turnovers.
