Interest and margin

#1

Assuming I have some holdings worth 5 lakhs that have not been pledged. I take a position in a futures/options contract with adequate initial margin. The position turns against me and there is negative m2m and the cash balance comes down. Can the broker allow me to hold the position overnight and then charge interest? By letting me hold the position is the broker not contravening the SEBI guidelines discussed on zerodha that mandate the broker to ensure adequate margin to cover the m2m, span margin and exposure margin? Please reply along with any reference to circulars or rules and regulations governing the brokers’ conduct. Thanks in advance.

Power of Attorney implication
#2

Exchange/SEBI allows to consider stocks that are lying in demat to be considered for margin, if you have given POA in favor of the broker. Btw, the onus is on the user to make sure there is sufficient funds in the account. I am guessing in your case, if he hadn’t considered the stocks in your demat as margin, you would have had to pay short margin penalty to the exchanges. Short margin penalty is usually much higher.

https://www.nseindia.com/products/content/derivatives/equities/penalties.htm

#3

Thank you sir. But my doubt is if the broker can carry forward my position when funds are inadequate and when there is no pledge. I understand the short margin penalties but the position would have closed on the day the margin fell short and the penalty would not be as high as the interest charged for a longer duration. Does PoA imply that the broker can sell my shares unilaterally and without my consent? Kindly reply soon sir. To my knowledge zerodha sends an sms and email instantly when ever the margin falls short and in all probability will be square off at the end of the day under RMS. If broker allows carry forward of the positions without squaring off under RMS then it is very dangerous because I can sell my shares offline also.

#4

I am awaiting your reply.

#6

I think @nithin sir is busy or otherwise not inclined to respond. I would be grateful if someone can post the SEBI circular that authorises the broker to treat my shares as pledged to him even though I have not pledged them. Zerodha, upstox, kotak and ICICIDIRECT do not provide any margin on the holdings without them being pledged (even for intraday) . Can the broker allow a position (in derivatives) to be carried forward when the margin falls below the exchange stipulated requirements? In that case what is the meaning of RMS? Assuming that it can be done, can the broker charge interest from me when the collateral margin is much higher (more than 5 tiimes) than the shortfall in margin stipulated by the exchange? It amounts to making the broker immune to risk while the client’ holdings are used by him for margin reporting to the exchange. Is it justified to charge interest when the value of securities after haircut is at least five times the shortfall in margin in carried forward positions? I do not know if I can name the broker who is doing this but will post in all forums to see that clients don’t get into hidden or fraudulent charges.

My holdings are worth more than 7 lakhs (all large cap stocks and ETFs) and the collateral will be at least 5 lakhs after haircut if I pledged them. The margin shortfall is less than 1 lakh. Under these circumstances is he authorised to collect interest? Was he not obliged to square off because PoA cannot mean he can sell or transfer my shares to his account!

#7

POA doesn’t mean the broker can sell stock without consent. But he can use the stocks lying in your demat with POA for margin reporting, hence you could use it for trading on F&O. If you lose money on F&O and don’t make up for the losses in cash, he could potentially sell the stock.

Check this circular

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#8

In that case where is the question of levy of penalty or interest arising #nithin sir? The value of the stocks after haircut was many times more than the shortfall that could be seen only by clicking the initial margin checkbox in the ledger request window. I would not ask you any further questions. It is not a question of losing the few thousand rupees that they have levied as interest. It is a question of the correctness of that levy. As mentioned here the margin shortfall arises only when the cash component in the total margin falls short of 50%. In my case there is no shortfall if the shares in my account have been used to provide me margin. I will soon be shifting to zerodha or continue with my icicidirect account even if the brokerage there is prohibitively high.Kindly answer this last query on this subject when you have time. I will not quote you or this question in the complaint I am pursuing against the broker

#9

It is responsibility of the user to make sure enough margins are there and if not to close the position. Broker will try to close the position for not having enough money but few times it may not be possible. Broker will try to make sure one won’t loose more money than what client has but during some black swan events he might miss on this also. If you believe it is up to broker then exchanges would have made it clear and penalize only broker . What ever is the case, end of the day if any margin shortfall is there broker has to make good of it out of his own capital.

It is your hard earned money at stake, I personally would suggest you to move on from this and maintain enough margins and make sure you take care of your own positions instead relying on broker. This is just my suggestion, rest is up to you.

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#10

Thanks @Siva for the reply. I understand that pretty well. I think I have not framed the question that can be easily understood. I have large cap shares and etfs worth more than 7 lakhs. I have not pledged them I have a poa that I have not even read because the account was opened online. PoA as I understand is only for transactions authorised by me and not anything else. Now the broker states that he is allowed to provide margin based on the unencumbered securities when there is a PoA. In effect the margin provided by the broker is on par with what would have happened if I pledged the shares. Pledging would have cost me 100 rupees. The collateral value of the holdings after haircut is more than 5 lakhs at the minimum. The shortfall in margin is about one lakh and the total margin required is more than two lakhs. So the cash component of the margin requirement was met by more than 50%. So what is the purpose of levy of interest. Also it is not the case of broker being unable to square off the positions because they were illiquid. The broker has effectively treated my shares as pledged and still levied interest when the cash component of the total margin i have infused was more than 50%. I hope the query is clear now. I just want the SEBI/NSE circular that authorises the broker to levy interest on the margin allowed on my holdings with him in the demat account. In the absence of such a circular or authorisation by the competent authority, I feel the levy of interest is illegal and needs to be refunded.

Thank you for the good advise and I will certainly follow that. It is not that I am getting bankrupt because of the levy of a few thousand rupees towards interest. It is a question of making sure that the broker is not abusing the system and cheating the clients. I think NSE would not have accepted this complaint if there was no merit in what I have mentioned. I have been following this forum and am very fond of this as well as the varsity. The greed to have a reduced brokerage than ICICIDirect where I have another account has made me fall into this mess.

#11

Hmm… if you were charged penalty/interest, then it is not right. Interest can be charged only if 50% of margin isn’t available in terms of cash.

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#12

Thank you very much @nithin sir. I salute your patience in responding to queries of non-customers like me. I think I should switch over to you without looking at the slightly higher brokerage that you charge.