Effective 1st Aug 2022, stock brokers are required to allocate client wise collateral with the clearing corporations. In over-simplified terms, what it means is brokers are required to inform the clearing corporations at the start of the trading day stating which client has given how much fund / securities to the broker. Further, the broker is required to ensure that client trades only within such margin limits so that the clients margin obligations do not exceed the sum of fund / securities as reported to the clearing corporations at the start of the trading day.
While, most of this is already being done at PM Securities by the RMS (Risk management systems) of the trading systems hence no major changes are expected in trading and margining procedures at PM Securities.
However, some minor changes are required to be implemented to adhere to the new regulatory framework. We are enlisting the key changes in margin limits that shall take effect from the start of trading day of 1st August 2022 at PM Securities:
1. Change in calculation of cleared fund balance: For the purpose of setting trading margins for clients the fund balance considered shall be the cleared fund balance of the client as on the trading day excluding all such credit bills clearing on the trade day.
For eg. if a client has added funds of Rs.100 from his bank to his trading account on Monday, and also sold securities worth Rs. 50 on Monday. As per the current systems (before 1st aug 2022), on Wednesday morning (T+2 day) the margin limits provided to client is Rs. 150 (Rs.100 on account fund balance and Rs.50. on account of settlement of shares worth Rs. 50 sold on Monday).
However, effective 1st aug 2022 at the start of the trading day on Wednesday, the margins available for trading shall be Rs. 100 and NOT Rs. 150 as at the start of the trading day on Wednesday Rs. 50 have still not been actually received by the broker (as the settlement of the sold shares happens around 11am on t+2). This Rs. 50 shall become available to the client as margins on Thursday morning, ie. available margins on Thursday morning will be Rs. 150.
However, as the proceeds from securities sold on t day become available on t+3 day the EPI benefit shall be provided for 2 days ie. t-1 day and t-2 day instead of the current method which only provides such benefit for EPI done only t-1 day.
2. Upper-cap on early pay in (EPI) benefit: Currently, if a client sell shares held in their demat account worth Rs. 1 Lakh on Monday an early pay in of securities is done on Monday and the client receives Rs. 1Lakh as margins on the following trading day ie. Tuesday. This benefit shall continue going forward as-well, however this benefit on account of EPI shall be capped to Rs. 10lakhs per client, ie. If a client has sold shares worth Rs. 25 lakhs on Monday, they will get Rs.10 Lakhs EPI benefit to be used as margins on Tuesday morning instead of entire Rs. 25 Lakhs.
3. No CFS (Credit for sale) shall be provided: Currently, when a client sells securities worth Rs. 100 they can use upto 80% of the value of such sold securities ie. Rs. 80 as margins immediately to execute further trades. However, starting the 1st of Aug 2022 such margins of Rs. 80 will not become available for further trading. This is due to the fact that such Rs. 80 is not actually available with the broker (as the funds for sold shares are received by the broker on t+2 day) and the broker cannot report this to clearing corporation at the start of the trading day as cash available for the client. However, we expect that a process o overcome this shortcoming shall be drafted shortly and we expect CFS to be resumed within a weeks time.
Above, stated changes are being implemented at PM Securities to adhere to the regulatory requirement in full spirit as they stand as on date, while ensuring minimal impact to trading. Further, we are hopeful that further enhancements to the regulations, systems and processes in due course shall help reduce / remove some of the limitations. We keep you posted on the same.