No Margin? No trades from January 2020!

Do you often buy stocks on credit in the cash segment and pay for them after a week? This practice will soon become history.

As per the SEBI circular dated November 19, 2019, Trading Members (TMs) and Clearing Members (CMs) will have to collect VaR (Value at Risk) margins and ELM (Extreme Loss Margins) upfront from their clients, starting from January 01, 2020. This is in line with existing rules that apply to the derivatives segment.

SEBI has stipulated that these margins can be paid by stock investors in cash or by depositing approved securities with their broker.

What is VaR+ ELM?

VaR margins cover the largest loss incurred on 99% of the days, as defined by the exchange while ELM is adequate to cover losses beyond those considered under VaR.

In other words, stock volatility and liquidity vastly affect VaR and ELM calculations. Simply put, you will have to pay at least 15%-25% margins for your trade upfront. The rest can be settled within T+2 working days.

Now, let’s look at this with an example. Suppose you want to buy shares of Rs 1 lakh, you will have to pay Rs 15,000 to 25,000 as VaR + ELM, depending on volatility and liquidity of the counter. And please don’t forget, the same rule applies to sales transactions as well. This sounds weird, right? Don’t worry, you won’t have to pay any margin if you hold DP and trading accounts with the same company and have given PoA to your broker.

Some industry players feared that these norms may inconvenience investors particularly those holding trading and demat accounts with different companies.  Well, if you have been dealing with Ventura Securities, you can REST ASSURED!

How will the new norms affect Ventura clients?

1. The impact of new norms on Ventura customers is close to nothing. Ventura’s risk management practices are robust and it’s been able to strike the right balance between allowing customers exposures and maintaining adequate margins and collecting the same from them.

2. You can use your Demat holdings as margin, after adjusting for VaR + ELM.

3. Institutional investors such as Foreign Portfolio Investors (FPIs) and mutual funds (that treat equity trades as business transactions) have been exempted from this rule.

Penalties for non-compliance

To curb malpractices in collection and reporting of margins from clients, SEBI has conferred powers in the hands of exchanges to take disciplinary action for false/incorrect reporting of margin collections by TMs and CMs.

To sum up…

The new norms won’t affect most traders/investors using new-age platforms, such as Ventura Pointer. Some traditional brokers may be affected. Nonetheless, new rules would bring in much needed discipline among investors and brokers alike.

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Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

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