Brokers Begin Enforcement Of Tighter Margin Rules Ahead Of Sebi’s Oct 21 Deadline

F&O traders feel margin squeeze

TRADERS in equity futures and options segment are getting to know the taste of a liquidity squeeze. A day after Sebi hiked exposure margins for positions, many brokers are not taking any chances. They have enforced the rule with immediate effect, though the Sebi circular says the revised margins will become effective only from October 21.
    On Wednesday, Sebi had announced that exposure margin for gross open positions in single stock futures and gross open short positions in stock options will now be the higher of 10%, or 1.5 times, the standard deviation — an indicator of volatility in a stock — in the notional value of the positions. Earlier, the margin was the higher of 5%, or 1.5 times, the standard deviation in the notional value of positions.
    Brokers say the tightening of margins will impact sentiment significantly.
    "The rapid rise in margin levels could compel retail traders to cut derivatives positions as they may not be in a situation to comply with the new margin requirements immediately," says Almondz Global Securities derivatives strategist Gurudatta Dhanokar.
    In many frontline stocks, the total margin — exposure plus span margin — is currently over 40%. A further hike would put pressure on traders at a time when the cost of funding is already very high. Fronline stocks like Reliance Capital, Suzlon, Reliance Communication, JP Associates, ICICI Bank and Reliance Infrastructure already require a total margin of over 40%. Stocks like Core Projects and MIC Electronics have a total margin requirement of 105% and 85%, respectively, as on date. The hike would result in total margin going beyond 50% in many stocks. This apart, traders will also have to shell out mark-to-market margins.
    The exchanges collect margins from brokers, who often use their discretion while enforcing the rule on their clients. Brokers are known to give leeway to clients who offer them high volume of business.
    "The markets have been very volatile in the recent past. This will certainly add pressure on players to fork out additional margins but at the same time restrict speculators. Sometimes brokers do not hike margins for some clients, but given the current situation, it seems that they would not be in a position to help their clients," says Ravi Sharma, derivatives analyst at Prabhudas Lilladher.
    The inability of investors to pay up additional margins in a leveraged market would see derivative positions of clients who are unable to meet the obligation, squared off by brokers.
    According to brokers, while the cost of keeping open positions have gone up for both bulls and bears in the derivatives segment, it will pinch the long position holders even more as they have incurred heavy losses in a falling market. This may prompt many traders to unwind their long positions, thus accentuating the fall in stock prices.
    Officials of the domestic brokerage say they have been advising their clients to be cautious and square off their positions if they feel that they would not be able to sustain the mark-to-market margin pressure in case the market falls further.
    The change will come into effect from October 21, the NSE circular said. The revised applicable exposure margin will be applicable in respect of 266 securities.
    apurv.gupta@timesgroup.com