In a bid to facilitate business transactions, the stock exchange regulator Securities and Exchange Board of India (SEBI) on Wednesday allowed securities funded through cash collateral to count as margin for the Margin Trading Facility (MTF). The move will also help reduce the burden of additional collateral for maintenance margin for the margin trading facility.
The development came after SEBI received representations from market participants through the Industry Standards Forum (ISF) demanding relaxation in the requirements for the margin trading facility. In a circular, SEBI said that shares or units of exchange-traded funds (ETFs) deposited as collateral with the brokers and those acquired through margin trading must be kept separate. While calculating the funding amount, these two types should not be mixed.
“If the broker has received cash collateral from the client in the form of margin for availing the margin trading facility and the trading member has given the said cash collateral to the Clearing Corporation (CC) for fulfilling the settlement obligation of the said client, then the same can be considered as maintenance margin,” SEBI said.
If a broker takes cash collateral from a client and uses the same to fulfil settlement obligations with the Clearing Corporation, the resulting securities received from the CC can be considered a maintenance margin. These securities have to be pledged in favour of the broker.
SEBI said that if funded stocks based on cash collateral provided by the client are used as maintenance margin, the funded stocks have to be from Group 1 securities. The margin on these stocks will be equal to Value at Risk (VaR) plus five times the Extreme Loss Margin, irrespective of whether they are available in the Futures & Options (F&O) segment. In addition, the regulator has asked trading participants to report their exposure to the MTF by 6 p.m. on day T+1 (the day after the trade date).
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