New rules of SEBI

What is SEBI?

Securities and Exchange Board of India is the one who makes the rules and regulation for the stock exchanges in India and has the responsibility to regulate the Indian capital markets.

SEBI operates within the legal framework of SEBI Act 1992 and it has some major objectives according to the SEBI Act:-

• Protection of investors interest in the securities.

• Promotion of the exchanges and development of the securities market.

• Regulation of the securities market.

• And matters connected therewith and incidental thereto.

What is the concept of margins in the new rule?

Margin rules and the manner of meeting margin requirement are both undergoing an important change. The market regulator (SEBI) is weak in norms to ensure robust risk measurement and to avoid a repeat of another fraud in the future well where does it leave you, your trades and your investments especially if you are new to the stock market and slightly confused about all the margin requirements.

Well, we have you covered because we will simplify you all the technicalities of Margins in the stock market. We will break this down for you all and make it as simple as any rookie can understand.

It the regulator who has been moving towards a system of collecting margins upfront in the cash segment right now. This is all about cash markets.

An upfront payment is a method of transaction in which a client pays a fraction or sometimes all, of a trade before it is completed. Think of it as a deposit.

Let me tell you about the concept of margin:-

When someone buys a share from the exchange the obligation will happen after t + 2 days, that was the settlement cycle we all followed but there was always a risk of the counterparty not obliged by this settlement and not to protect the whole industry or whole ecosystem of the stock market against that in the cash market then the margin concept introduced.

Margin has its own two-component:-

• Dynamic margin - Dynamic margin depends on the volatility of an instrument. Assume, an instrument where daily volatility is 2% the margin will be lesser in dynamic margin than an instrument where there is the volatility of 5%. It is because there is a risk associated with the trade position which the person is carrying. So in simple form is the initial margin which is the VAR margin which is called value at risk margin. These system is carrying because of the position of the counterparty and that counterparty could be anyone buyer or seller of the underlying asset so dynamic margin keeps on updating based on the volatility changes in an instrument.

• Static margin - Static margin as you can identify by its name that it is static in nature. Its also called Extreme loss margin (EML) which is actually defined by the regulator and by the exchange on a periodical basis but that's like protecting a major major flow of risk in the system so both together will define the margin requirements in the cash segment and if you talk about the derivative segment (Future & Options) it's pretty much the same logic but the nomenclature is different one is the initial margin which is the span margin which is more at a Portfolio level or community EML a dynamic margin and a static margin so now for the purpose of conversation we are restricting it to a side we are not going to futures and options. 

The New Rule:-

Which is why the merchant(trade) that we discussed are going to be the extreme gross margin and the value at risk margin to be collected upfront but there is no penalty. 

Now what does that mean if I want to execute an order I want to buy a stock at one lakh rupees how much will you ask me to pay upfront as my broker on my behalf will it have to come from me.

How does the system work:- 

A broker will always have to pay the clearing Corporation based on the rules defined by the clearing Corporation(SEBI) because the clearing Corporation responsibility is to make sure that the risk associated with that trade is nullified and they will take the money from the broker, not till date the broker had an option to give the extra leverage to the client to pay the requisite merging now that leverage will reduce significantly because of the client changes.

So let's take an example:- if you want to buy 100000 worth of Reliance today so before the change in regime you need not pay any margin so you buy today and say for example you sold today which was perfectly fine inductor current Regime and say you made a profit you take the profit home or if you make a loss you will compensate for the loss weather today or by tomorrow you will have to compensate for the loss and that's how the traditional brokers have been following (The old way).

Effects:-

If you talk about the bank based broker like safety securities or discount brokers because they have always tried to follow the clear guidelines defined by the regulator but in terms of other brokers we always had this extra advantage of providing cert-in Astra facility to the client in case there is no restriction of putting the margin but now that restriction is not getting set in the system in form of a penalty that's where you know the discipline maybe perhaps come in.

The margin rules of SEBI was made effective from September 1st 2020.

The broker has been instructed to collect VAR (value at risk) and EML (extreme loss margin) upfront from their clients.

Now for this rules will be implemented in Phases manner starting in December 2020:-

• For Phase 1:- From December 2020, The brokers will be penalized if the margins exceed 25% of the sum of VAR and ELM.

• For Phase 2:- From March 2021 and June 21, the brokers will be penalized if the margin exceeds 50% and 70% of the sum of VAR and ELM.

• For phase 3:- From August 2021 brokers will be penalized if the margin exceeds VAR and ELM.

How will this rule impact on India's market capital:-

• Some of the brokers are mad with the new rules of SEBI as their daily turnover may shrink by almost 20 to 30% of the there original target.

• The clients will also have to maintain a higher margin in their account and which it will also impact return on investment and this changes.

• It will not only impact the brokers but will also impact the government as the securities transaction tax(STT) will reduce respectively.

The benefits of these new rules:-

• Brokers can't exploit your shares at there will. Since the stock doesn't leave the investor's account there less chance of misuse of securities.

• Corporate actions will run smoothly. Since the stocks are held in the broker's Collateral account the broker is the recipient of all-cash and non-cash corporate actions like dividend and bonus rights etc. Now the broker has required to voluntary transfer this benefits to the investor as soon as possible.

• Some liquid funds give dividend in the form of more units of the same fund which was kept with the broker instead of transferring them to the investors. And now it will not be possible for all.