How does pledging of FD for F&O margin work

General
1

If we pledge an asset as collateral (say Fixed deposit or Niftybees or shares), we get margin.

Next steps is what I am unsure of

If I have say pledged assets worth 1 lakh and so now I have margin of 1 lakh available with me

If I short 4 lots of nifty which requires me to give total margin of say 90,000. Will the available margin from my pledge be enough or is there any requirement for cash component to be deposited also.

What happens if I book a loss of say 10,000 on the above short sale?

1 Like
2

Giving fixed deposit as a collateral is something most brokerages don't accept. When you pledge FD's, exchanges don't accept FD which is in the name of the client. You will have to book the FD in the name of the broker, and the broker in turn can submit it to the exchanges. This is an operational nightmare, and hence most brokers don't support this. 

But you can very easily pledge anything that trades on the exchange like equity and ETF's like liquid/nifty bees. I can tell you how the processs works at Zerodha

  1. Send an email to [email protected] asking to pledge the stocks, name and quantity. We will very soon have a functionality to do it directly from Q. 
  2. Once the pledge has been accepted, the next day you will see the additional margin after haircut in your trading account. Haircut can vary from 10 to 40% based on the stock. Assume the haircut on your 1lk of stocks is 20%. So next day you will have Rs 80,000 available in your trading account to trade F&O with (you are not allowed to take further delivery of equity/stocks with this money). 
  3. We used to initially ask some cash component, but today we don't. So assuming 20k is margin per lot, you can buy 4 lots of Nifty with 80k in your account. If there is a loss of 10k, we ask you to transfer it to the trading account before beginning of the next day. If you don't, the stocks pledged would be squared off to that extent. So it is always best to keep some cash as buffer for any MTM losses. 
  4. Unlike most brokerages, we don't take the risk when you pledge the stocks by keeping the stocks with us and charging you an interest for the margin. What we do is that the entire stock is pledged with NSCCL itself and you have to pay no interest on the money. Every stock irrespective of how much quantity, the  pledge/unpledge round trip cost is around Rs 60 in dp and other charges. 

Hope this helps 

2 Likes
3

Thanks this is what I was looking for.
So in short (pun unintended :D)
I get 80K as margin against the pledge of 1 lakh worth of shares and say i keep 20K as buffer for any M2M losses.
This clears my doubts thanks

4

Hi Nithin, any idea when the feature to do the pledging directly from Q would be added ? It would help in streamlining the process.

5

Hi Nithin,
Is this enabled in Q now ??

6

@nithin sir, any updates about it ? Can I pledge liquid mutual fund, bought from coin as collateral?

7

Use Fixed Deposit/FD as COLLATERAL for Trading

https://youtu.be/psQR4EIAQ1Y

Nicely explained in the video. It appears, NSE has simplified the process by having 3rd party FDR. I believe, zerodha can introduce this atleast for say (10 lac) and above…

Thanks

8

You still have same policy that you entire pledge is with NSCCL so u don’t charge any interest?

9

U said no interest charge but than I read somewhere u charge 0.05% per day …I am confused.

10

When you pledge, you get collateral margin. This margin that you get is interest free.

But when you take any position, only 50% of the money required to take any position can come from this collateral margin. The rest of it has to be funded by cash. If for any position that you take you have 100% money required from collateral margin and 50% not available in cash, you end up using brokers capital. So if you use brokers capital, then there is interest charged.

11

Ok, so when use securities or MF as collateral we get collateral margin and I believe that margin is not from broker but that margin is from NSCCL directly correct? and that is why there is no interest on that?
Because earlier in this same thread you said following
“Unlike most brokerages, we don’t take the risk when you pledge the stocks by keeping the stocks with us and charging you an interest for the margin. What we do is that the entire stock is pledged with NSCCL itself and you have to pay no interest on the money”

You still have the same practice of pledging clients entire stock to NSCCL?

12

Many brokers when they give you margin, they don’t pledge it with NSCCL. They keep it in their pool accounts and then give you margin. So taking the risk. Some of these practices are being forced to be stopped by SEBI. For example, very soon all brokers will be allowed to offer margin against securities, security sitting in client demat and pledged to NSCCL. Stocks will never move from client demat after that during a pledge.

1 Like
13

'Stock should not move from client demat …is peace of mind for clients. Otherwise we have heard many brokers misusing the trust of clients. So I was asking u still have the same practice of not keeping in your pool account for pledge correct? You still direct pledge with NSCCL ?

14

yep, we have always pledged it with NSCCL. Pledge being marked directly from client demat will probably happen in 3 months.

2 Likes
15

I see…but currently a client can login to easiest and pledge from there correct? do you offer such pledging facility (of course you have to be a trusted demat account before one can pledge from there)

16

That is pledge towards NBFC for loan against securities. LAS where you get money in your bank account, not the margin you get for trading F&O.

We don’t currently offer easiest. The issue with this is, clients can move securities out and also sell it on the trading platform. It is a risk management issue for online brokers, and hence most brokers don’t offer that.

18

@nithin I am still confused… .if we pledge our shares using CDLS easiest who gives the loan against securities (LAS) …My understanding is NSCCL is giving that loan and that loan comes to client’s trading account via broker(form NSCCL) correct me if I am wrong.

You said Zerodha does not offer easiest pledge facility …because even after the pledge thru easiest client can still move and sell those shares in open market (pledgee i.e. the brokers who accept such pledge don’t have any control on that )

Zerodha does not offer easiest but u do offer collateral margin (loan) against shares if we pledge those shares to you …which you in turn pledge to NSCCL …in this case who is NBFC …Zerodha has tie up with an third party NBFC or NSCCL act as NBFC …and in any case u said its NBFC loan …than why there is no interest charged?

19

There are two things you can do with your securities in your demat account.

  1. Pledge it for trading F&O. So you pledge it with your broker, who in turn either keeps it in his pool or keeps with NSCCL and gives you margin to trade F&O. Haircut is usually 20 to 25% for pedigree stocks, so you get margin of upto 75% of stocks pledged. This is margin and hence can’t be withdrawn from your trading account. This pledging to NSCCL can’t be done using CDSL easiest as it has to happen through the trading member or broker today.
    But like I said, soon the facility will be available with depositories, as SEBI has mandated that when pledging happens for getting margins, it should be done to NSCCL directly with security sitting in client account itself.

  2. Pledge it to an NBFC for getting loan (Loan against securities or LAS). This is like any other secured loan (gold loan types), where the money comes to your bank account. You can use this money for anything. NBFC’s are allowed to give a maximum loan of 50% against any security. This pledging to NBFC can be done through CDSL easiest.

1 Like
20

  1. You said pledging to NSCCL can not be done thru easiest but when I checked on how to pledge using easiest …it shows …pledgee has to be your broker (trusted account) so basically it goes to your broker and ultimiately he decides either to keep in his pool or NSCCL like you choose.

  2. Pledging to NBFC can be done thru easiest …but how …like I said only opiton to pledge is to pledge to a trusted demat account and your broker is the only in the list of trusted account.

21

@VenuMadhav can you check this one. I might have mistaken easiest and normal pledging through demat.