General Knowledge : How do brokers manage and prevent client defaults? What are the available things in hand for the broker? Please elaborate about recovery process and more

General
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Any materials or link to modules like zerodha varsity etc are most welcome

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@nithin can you elaborate if possible?

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Hi Krishna,

Systemically, SEBI regulations (Peak margin requirements from Sep 1st 2021 & its effects) make it difficult for clients to take positions with excessive leverage. Which is one line of defense before reaching the default stage. Also the margin requirements closer to expiry that has been set up by us helps reduce defaults to a large extent - What is Zerodha's policy on the physical settlement of equity derivatives on expiry?.

The other line of defense is our RMS team who track and manage the risk as much as possible.

But of course there can be defaults despite this - which can attract legal action as well.

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What happens in case of say a market Crash like let’s say Lower Circuits on Nifty, if I am Short Calls on Nifty and had sufficient margin when trade was initiated, then any risk of my positions getting squared off by RMS team etc? Is there a way to test/verify this?

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If you are short calls, why would they square off? You will be in profits

I guess you meant puts?
Per lot margin is 1L, it assumes the risk upto 10% gap up / down

upon this move, margin requirements will shoot up and I guess RMS policy will kick in such conditions

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Thanks Pai :pray:

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