Client Margin Collection and Reporting in Cash Segment
Market Regulator, SEBI has instituted a directive stating that all clearing and trading members need to mandatorily collect certain margin upfront from clients for trades in the cash segment similar to the Equity Derivatives segment.
Failure to comply with these norms would attract a penalty. The penal provisions for non-collection /short collection of margins has been in effect (in the Cash Segment) since September 01, 2020.
To know more about the new guidelines read the FAQs and process notes below:
What does Reporting and Collection of Margins in the cash segment mean?
It means brokerage companies have to collect margins in the form of Cash / Securities by way of Margin Pledge upfront from their clients in the cash segment and this will then have to be reported to the exchanges in accordance with SEBI’s new directive.
You can read the exchange circulars by clicking on the links below:
The term ‘Margins’ here includes minimum margin of 20% in lieu of VaR margin and Extreme loss margin (ELM) + mark to market margin (MTM) + delivery margin + special / additional margin or any other margin as prescribed by the Exchange to be collected by the Broker.
Is Collection of Margin & Reporting compulsory in the Cash Segment?
Yes, SEBI through its circular dated November 19, 2019 ‘Collection and reporting of margins by Trading Member (TM) /Clearing Member (CM) in Cash Segment ’ introduced a new directive that has made Collection of Margin and Reporting for Cash Segment Trades by brokerage companies mandatory.
What are the timelines for bringing in Margins for Cash Segment?
The Client is required to bring upfront Margins in the form of Cash / Securities (for E-margin and margin product only) by way of Margin Pledge and must ensure that Margins are paid in advance of trade. The Margin component consisting of Minimum Margins and Additional Margin along with Marked to Market loss will also have to be paid by the client.
Is there a Penalty for non-collection and reporting of Margins to the Exchange(s)?
Yes, there is a penalty that will be levied by the Exchange for short reporting of margin, which will be borne by the client.
Who will pay the Penalty for Short Reporting of Margin to the Exchange?
In case of failure, on part of the client, to bring in the required margins as prescribed by the regulatory body, a penalty will be levied by the Clearing Corporation on the Broker for short reporting of the client’s upfront margins / margin on consolidated crystallized obligation / MTM losses. This penalty will then be claimed by the broker from the client.
What will the Penalty Charges be?
The following penalty shall be levied in case of short reporting of margins by the Broker (per instance)
|SHORT COLLECTION FOR EACH CLIENT||PENALTY PERCENTAGE|
|(< Rs 1 lakh) And (< 10% of applicable margin)||0.50%|
|(= Rs 1 lakh) or (= 10% of applicable margin)||1.00%|
If a client does not bring in the required margins for more than 3 consecutive days, then a penalty of 5% of the shortfall amount shall be levied for each day of continued shortfall beyond the 3rd day of shortfall.
If a client does not bring in the required margins for more than 5 days in a month, then a penalty of 5% of the shortfall amount shall be levied for each day, during the month, beyond the 5th day of shortfall.
Will there be any changes in Fresh Buy / Fresh Sell orders in the Cash and Carry (CNC) Product?
No, but when a customer places a buy order the entire buy amount will be placed on hold, the amount equivalent to the upfront margin will be debited on the same day and the remaining amount will be debited the next working day.
In case of a sell transaction the shares, which were earlier debited from the demat account on T+1 day, will now be debited on the same day.
Scenario 1: Buy Today Sell Tomorrow (CNC),
Suppose our Client Mr A has bought 100 Shares of XYZ Company Limited at Rs. 1100 per share on Monday (T Day), the applicable margin on the security is 25 %.
a. Will he be allowed to Sell on Tuesday (T+1 Day) i.e. Buy Today Sell Tomorrow (BTST)?
Yes, Mr A will be allowed to Sell 100 Shares of XYZ Company Limited, that he had bought on Monday (T Day), on Tuesday (T+1 Day) provided he has paid Margins on the Sell side like he paid for the Buy side of his transaction.
In the above example no additional margin will be required as the total margin requirement for the buy and sell transactions put together is 50%. In case, the combined margin for buy and sell transactions is greater than 100%, then additional funds would have been required before the order is placed. Thus, at the time of placing this sell order, the system will check whether the margins are sufficient or not. In case excess margin is charged, it will be released on T+2 day (EOD)
b. Will he be allowed to Sell on Wednesday (T+2 Day)?
Yes, Mr A will be allowed to Sell 100 Shares of XYZ Company Limited on Wednesday (T+2 Day) without any additional margin.
Scenario 2: Sell Today Buy Today (CNC)
Suppose our Client Mr A has Sold 1000 Shares of XYZ Company Limited at Rs 1100 per Share on Monday.
a. Will Mr A be allowed to use the sales proceeds to buy a different stock?
Yes, Mr A will be allowed to buy different securities against sales proceeds.
Please note that the shares which are sold will be debited from the demat account on the same day for the purpose of upfront margin and an early pay-in will be done to the clearing corporation.
b. Will Mr A be allowed to use the sales proceeds for buying back the same XYZ Company Limited Stock?
Yes, Mr A will be allowed to buy back the shares of XYZ Company Limited against the sales proceeds of XYZ Company on the same day.
Scenario 3: Sell Today Buy Tomorrow and day after tomorrow (T+1) and (T+2)
c. Will Mr A be allowed to use the sales proceeds for buying different Stock on T+1 & T+2 Day?
Yes, Mr A will be allowed to buy shares of different company against the sales proceeds of XYZ Company on T+1 & T+2 days.
Scenario 4: E– Margin / Margin Trading Funding (MTF)
Suppose our Client Mr A has taken a position of 100 Shares of XYZ Company Limited at Rs. 110 per share on Monday (T Day), and pays the applicable margin on the security of 25% .
a. Will he be charged Margin on T+1 day for Selling?
Yes, Mr A will be charged margins for selling his position on T+1 Day. However, the said margin will be released on the next trading day i.e. T+2 day from the original position date.
b. Will he be charged Margin for selling on T+2 Day and after?
No, Mr A won’t be charged margins if he sells his E Margin position T+2 Day onwards.
What is the impact on Intraday Product & Cover Products?
The margins on Intraday and Cover Products will continue to remain the same as the current scenario and there won’t be any change.
What will be the impact on limits of shares in Withhold?
For Offline mapped Clients only Quantity limits will be provided for shares in Withhold.
Can a client sell Shares that are under Margin Pledge?
Ideally, one should not sell the shares that have been Pledged as Margin, as it may attract a penalty. Since the un-pledging of pledged shares only takes place on T+1 day, an early pay-in will not be possible on T day itself. It is, therefore, advisable to first un-pledge the shares and initiate the sell transaction only after the shares are unblocked in the Demat account.
Key changes for clients dealing in Margin Products
These are very important changes applicable to Clients buying Securities in Equity Segment under Margin Product
- The offline mapped Clients buying Securities in Equity Segment under Margin Product are required to bring in funds to clear their debit latest by T+2 Days.
- All Equity Buy Orders will require 100% Upfront Margin.
- A Buy Today Sell Tomorrow Orders Sell leg will also require Margin.
- In case of failure on the part of clients to meet the debit obligation by T+2 Days (as per Exchange settlement cycle) any further position taken in the Equity Segment, Equity Derivatives Segment or Currency Derivatives may result in short collection of margins
- In such a scenario, the clients may become liable to pay a penalty for non-collection /short collection of margins.
Let’s say a client has bought shares on T Day worth Rs 1,00,000 by paying the necessary cash Margins of Rs 30,000. On T day or T+ 1 Day he takes a position in a Derivatives Contract by bringing in required margins in cash Margins of Rs.1,50,000. Will the client be reported short if he does not clear the balance Equity Debit of Rs. 70,000 by T+2 day?
Yes, he will be reported short because on T+2 day the Equity net debit of Rs. 70,000 is still pending payment. So when the margin requirement is reported on T+2 day, the Equity Net Debit of Rs.70,000 will first be adjusted from the Rs. 1,50,000. Hence, against the Margin Requirement of Rs. 1,50,000 only Rs 80,000 will be reported and the client will be reported short by Rs. 70,000.
Important changes in our processes to be noted in light of the Regulatory Changes to the Collection and Reporting of Margins in the Cash Segment
- For shares bought, the funds will be debited directly from your Bank Account on T Day (Trade Day) to the extent of the Margins required and the balance will be debited on T+1 Day.
- For shares sold, HDFC Securities Ltd (HSL) as a broker will try and pay in these shares on the same day, to achieve an early pay in to the Clearing Corporation. This would ensure that you do not attract a penalty in line with the clarifications issued by the NSE.
- If for any reason the aforementioned process does not work and there is still a shortfall in the margins required by the clearing corporation, the system will automatically try and pull in funds from the bank account that is linked to your trading account; this amount would later be released post settlement or once the margins are adjusted.
- Selling of shares that have been pledged, as per the new margin pledge system, would attract a penalty. We, therefore, recommend initiating a release request for the pledged shares first and to sell them only once they have been released from the pledge.
Please note: This release process would take 1 day to be completed.
To know more about the new Margin Pledge Mechanism and to learn how to pledge and un-pledge your shares on HDFC securities please click here (https://www.hdfcsec.com/margin-pledge-mechanism)