Sebi circular on margin: Brokers forum express concerns, to meet regulator on January 8

The risk management framework which existed before the revised Sebi circular stated that stockbrokers should have a prudent system of risk management to protect themselves from client default.

Margins are likely to be an important element of such a system. The same shall be well documented and be made accessible to the clients and the stock exchanges. However, the quantum of these margins and the form and mode of the collection are left to the discretion of the stockbrokers.

Accordingly, all stockbrokers have their own risk management policies for client dealings. Based on the profile of the client, their needs and their requirements.

According to the brokers, the current Sebi circular has at a short notice reversed a fourteen-year-old policy and forced stockbrokers to mechanically follow the margin collection processes as setting up by the Clearing Corporations. The business intelligence of the stockbroker who is the last mile connectivity to the client has been ignored.

Brokers also feel that Sebi’s circular will have an adverse impact on the business models of relationship-based business. Different Stockbrokers follow different business models like 3 in 1 account (bank, demat, trading), 2 in 1 account (demat, trading) and only trading account (standalone trading).

For the section of the brokers who have a relationship-based business, their core differentiation is the service experience of the client and ability to provide operations in a manner suiting the style of the client.

For example, it is common to have some customers who make a payment only after they have received the final bill/ contract. Sebi's new circular seeks to take away this flexibility and convert the entire service experience into a mechanical exercise by making an upfront payment of margin.

Brokers also say the compulsory margin collection proposed puts the standalone stockbroker at a significant disadvantage vis a vis 3 in 1 and 2 in 1 accounts, since securities lying in the demat account with Power of Attorney (PoA) is currently considered as margin collected for the purpose of reporting, which may not be possible for the standalone stockbroker.

Such brokers will be required to have the securities transferred/pledged from the demat account of the customer to the client collateral demat account of the stockbroker, thus increasing the operational complexities.

Apart from the effect on the business models, brokers have also highlighted the operational complexities. Sebi's new circular will require daily reporting of margin collection and hefty penalties for mistakes.

The circular envisages up to 100 percent penalty for incorrect margin reporting, enough to default a stockbroker in penalties itself if a pragmatic view is not taken in case of genuine mistakes. Also, many cash market-focused stockbrokers simply do not have the systems and processes of reporting margins on a daily basis.

Recently, there has been a case of a stockbroker having misappropriated the client funds and securities. Efforts are being taken to ensure that minimal clients assets lie with the stockbrokers.

Sebi's circular goes diametrically against such efforts and forces Stockbrokers to insist that their clients deposit their funds and securities with them for margin, even when the stockbrokers do not desire so in a T + 2 environment.