Association of National Exchanges Members of India

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1 November 19, 2014 Securities and Exchange Board of India Plot No. C-4-A, 'G'Block, BKC Bandra (East), Mumbai Kind Attention:- Mr. S. V. Murali Dhar Rao - Executive Director Dear Sir, Sub: Suggestions on margin trading facility to clients This has with reference to the meeting with Chairman on 11 April During the meeting, members present had suggested SEBI to review of margin trading facility norms. We have been asked to provide note containing suggestions on the margin trading facility norms. Our note containing suggestions is as under:- Margin trading facility was introduced by SEBI in However, based on data of margin funding published on exchange s website, it appears that it has not received desired participation from clients. We believe that there exists a need to relax some of the conditions specified in the margin trading circulars dated March 19, 2004, March 31, 2004 and March 4, 2005 issued by SEBI. Major concern raised by the client is about non-inclusion of many securities, high initial and maintenance margin levels and compulsory cash margin. Due to these issues, many clients don t avail margin trading facility and probably opt for NBFC financing. There is a need to rationalize various requirements enumerated in the SEBI circular. In this regard, we would like to give following suggestions: S. No Area of Suggestion Existing Requirement Suggestions 1. Sources of Borrowings by Brokers. For the purpose of providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks and/or NBFCs regulated by RBI. A broker shall not be permitted to borrow funds from any other source. The stock broker with credit rating from credit rating agencies should be allowed to borrow funds for margin financing business from any other source in addition to bank and/or NBFCs. The stock brokers meeting the above criteria should be permitted to borrow funds for margin trading business through: 2. Indebtedness of a broker At any point of time, the total indebtedness of a broker for the purpose of margin trading shall not exceed 5 times of his net worth. issuance of rated Commercial Papers, Debentures from capital market including from mutual funds, corporate entities and/or FIIs; and/or Through Inter Corporate Deposits from corporate entities. If a stock broker has credit rating from credit rating agencies, then the total indebtedness of such stock broker for the purpose of margin trading should be raised to 8 times of its net worth.

2 3. Securities eligible for margin trading facility (MTF) 4. Margin Requirements Group 1 securities and all the securities which are offered in (IPOs) and which meet the conditions for inclusion in the derivatives segment of the Exchanges would be eligible for MTF The initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively. 5. Forms of Margin The initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively to be paid in cash. In addition to cash, Fixed deposits with banks and Bank Guarantees which are cash equivalent can be considered as acceptable form of initial and maintenance margins for the purpose of availing the MTF. The universe of securities eligible for trading in MTF is limited. There are many fundamentally strong stocks with large market capitalization (See annexure 1 giving sample list of securities having market capitalisation of over Rs. 500 crore ) but are not part of Group-I securities. Hence all the equity shares listed illiquid securities (identified by Exchanges every quarter in accordance with the criteria specified in SEBI circular dated February 14, 2013 ) should be eligible for trading in MTF VaR or 30 % whichever is higher should be considered for initial margin and maintenance margin (difference between the security value and loan given) may be maintained atleast at 20% beyond which broker may have discretion to liquidate client s position. For the purpose of calculating margin availability ( Initial as well as maintenance margin), in addition to Cash, Fixed Deposits/Bank Guarantee, margins in other forms allowed by Exchange for derivatives trading like Equity shares of companies, units of mutual funds, corporate and government bond etc with an appropriate haircut should be permitted. 6. Restrictions on Liquidation of Securities Clause The broker may liquidate the securities if the client fails to meet the margin call made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or where the cheque deposited by the client has been dishonoured. Clause The broker may also liquidate the securities in case the client s deposit in the margin account (after In addition to the criteria given in clause and 1.7.2, there should be additional criteria as listed below in which the stock broker should be allowed to liquidate the securities after giving notice to the borrower: In case of default by client in making interest payments. (Where interest amounts have not been paid by the client for more than three months). If the client fails to repay the loan recalled upon by the stock broker as a lender after giving reasonable period of notice to repay. In case of a falling market situation or where the price of the securities is

3 7. Separate clientwise demat account for margin funding adjustment for mark to market losses) falls to 30% or less of the latest market value of the securities, in the interregnum between making of the margin call and receipt of payment from the client. Clause However, the broker shall not liquidate or use in any manner the securities of the client in any situation other than the ones mentioned at paras and The broker shall maintain separate client wise accounts of the securities purchased on margin trading with depositories and shall enable the client to observe the movement of securities from his account (through internet) expected to fall or such circumstances arisen which are likely to jeopardize the interest and exposure of the stock broker as a lender (For e.g. the market situation prevailing in January 2008, October 2008 and December 2010 where sharp intra-day fall in the prices of the securities were observed and it was evident that the fall will continue and available margins would be inadequate vis-à-vis fall in the scrip or the markets) In case where prices of the securities are hitting lower circuit consistently / time and again (for e.g. MCX Ltd. and Financial Technologies Ltd., etc.) or in case of an adverse news in a funded security, (e.g. news on fraud in Satyam Computers, Orchid chemical, arrest of MD of DB Realty & Bhushan Steel, etc.) and the stock broker exercises his right to withdraw funding given in such stock and recall the existing loan against such stock and the client fails to repay the recalled loan. The separate client wise demat account may not be insisted upon and broker should be allowed to keep all the securities under margin trading in a separate beneficiary account opened in the name of broker. The broker should be allowed to pledge these securities to borrow the funds from the lenders. 8. MTF from one broker per exchange Obtain a declaration from his client whether he has availed of any margin trading facility from any broker in any exchange, or whether his request for margin trading with any broker was rejected and if so, in both the cases, obtain the name of the broker and his registration number Client may be allowed to take the margin trading facility through more than one broker. There should be no requirement of obtaining NOC from a Broker for availing Margin Trading facility from another Broker.

4 9. MTF only in securities permitted by specific exchange Margin Trading Facility in one exchange can be provided only on those securities which are permitted by the said exchange. If securities is listed under both the exchanges and it is permitted for margin funding by one exchange then by default it should be permitted in other exchange also where scrip is listed. 10. Arbitration Mechanism 11. Calculation of maintenance margin The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility. Maintenance margin" would mean the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day s closing price, to be maintained by the client with the broker. Exchange Arbitration mechanism should be available for disputes arising out of the Margin Trading facility. This will be in the interest of the Clients as well as the Broker. This seems to be typographical error. If valuation of the securities purchased under margin funding facility increases, the necessity of top up of margin is redundant since the additional margin is required only when the valuation of securities fall compared to the rate at which it was purchased and not when it increases. Hence we request to review the calculation on margin requirement. Maintenance margin has to be calculated on previous day s closing price and any gain has to be added to margin available and any reduction/loss has to be reduced from margin available. 12. Margin Call Under the extant norms, the client is required to make the payment towards margin shortfall on the day following the day on which margin call has been made by the broker. The client can pay the margin shortfall in cheque. Looking at the volatility nature of market, it is necessary that the shortfall in the margin is replenished by the client before the start of market on next trading day. Hence, the client should remit the money by such mode which enables brokers to receive the funds in his account before the start of the market on next trading day. 13. Need for a Credit default Agency No regulatory requirement specified. SEBI should establish an agency like CIBIL or allow CIBIL to give membership of CIBIL to stock brokers as an Information provider and not merely as a consumer of Information. All stock brokers offering margin funding facility should be compulsorily asked to take membership of such credit information

5 agency or CIBIL and verification of all the clients with such credit information agency should be made mandatory before giving the funding. Similarly in case of default of a client the reporting of the same to such credit information agency should be made mandatory. At Exchange level, the details of all defaulters should be collected and made available to the stock brokers. 14. Audit of Books of Accounts The books of accounts, maintained by the stock broker, with respect to the margin trading facility offered by it, shall get audited on a half yearly basis. The present norms of internal audit of the stock brokers covers the audit requirements of Margin trading facility and no separate audit should be prescribed. 16. Maintenance of Margin Trading account of the client No regulatory requirement specified. For operational convenience, Margin Trading account of the client should be maintained by the stock broker in their books at client level and not at Exchange level. Similarly, while doing daily reporting to the exchanges one single figure of funding availed by the client from the stock broker should be reported to both the exchanges. Kindly get in touch with us in case you require any clarification. Thanking you. For Hemant Majethia Chairman-WIRC