Is Mutual Fund pledging being stopped by SEBI?

My friend just got a call from Fyers. The guy asked him to exit all his positions soon because after 31st March, all mutual funds pledging will be stopped and he won’t get any margin from mutual funds.

My friend posted this in our trading group. I find that hard to believe since it’s such a big change and there would have been a lot of noise around this if it was happening.

Then i searched on twitter and found a few guys complaining about this same issue. Fyers and 5Paisa seems to be warning many clients about unpledging of mutual funds.

Email from 5paisa

What’s going on? Are some brokers mis interpreting the circular regarding pooling of client funds?

Will zerodha stop proving margin for mutual funds? Most of my capital is invested and I’m an option sellers using that margin for trading purpose. It would be a huge blow for me.

Please clarify
@nithin
@Bhuvan
@ShubhS9

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This will be disastrous if true. What is going on. When did this circular come?
@nithin
@ShubhS9

See the redemption section 3.3.2 of the Following SEBI Circular SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/634

It says that upon redemption, AMC shall ensure funds shall be directly credited to client’s account.

  1. What they’ve forgotten is Mutual Funds Units can be pledged as collateral?

  2. What happens when the same are pledged for Loan ?

SEBI/HO/IMD/IMD-I DOF5/P/CIR/2022/29 of March 15th says everything will be effective from 01-April-2022.

Brokers could have studied this circular upfront and should have informed clients not to take positions for 31-March Strikes.

Brokers had 6 months to study this circular. If they have not done anything in past 6 months how can we expect them to do something now?

This is shocking. I hope this is not implemented at Zerodha.

I think the issue is that when mutual fund units are redeemed, they’re supposed to be sent directly to bank account of client.
But if the units are marked in favour of the broker, then of course the broker can take his due amount(if any) and then forward the rest to the clients bank account or trading account.

All my plans will get f*d up if mutual fund pledging is stopped. What is SEBI even thinking.

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This is the scariest thing I am reading today. Please clarify on this. My entire trading capital is in mutual funds and if its not allowed for pledging, I would have huge penalty for margin shortfall.

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SEBI came with revisions later. This Particular Point to be implemented from 01-Apr-2022. Due to CASH settlement ending on 29-Mar-2022, their RMS Team froze the margin abruptly.

1/3rd Additional Cash Margin + 2/3rd Adhoc margin only for square-off provided.

By “they” i assume you mean Fyers. Does this mean that they will go back to the existing system after a few days?
and why is no one on twitter or any trading group concerned about it?
Seems like only fyers and 5paisa doing this.
@ichetan

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It simply means other brokers are sleeping and waiting to deal with once 1st of April comes.

Why would you have penalty. Just square of your positions before that.

This is highly unlikely. For something of such scale which will affect millions of traders, all brokers sleeping doesn’t make sense.

Its not as simple as that bro. He’ll probably incur losses.
In market everybody trades with time. If suddenly positions of everyone is squared off then more than 90% of traders will loose their money.

If Zerodha says that we will stop accepting Mutual Funds for pledging on 1st April, most of the people will think its a April Fool made by zerodha.

an update
Fyers has automatically unpledged all the mutual funds that my friend had pledged. He called and confirmed. They told him that he could pledge stocks, etfs like niftybees/liquidbees if he wants but no more pledging of mutual funds.

So someone can pledge nifty bees but cant pledge nifty index fund. has SEBI lost it or what?

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All of the options writers I have seen pledge stocks or Liquid Bees or Bonds.
Only the newbies who wants to try their hands in option selling pledge mutual funds because they have it in their portfolio and they came to know that brokers accept it as pledge and we can sell options by pledging them.

What about liquid funds? Can you check?

So as per you liquid funds will still be allowed?

You are missing the point that Nifty Index Fund or any other Mutual Fund is in full control of the trader and not broker (credit goes to SEBI) then how can the poor broker accept it as pledge. Say a person has 1 crore worth of house or any land, can a broker accept it as pledge if he can’t realise it if something goes bad?

If Zerodha wasn’t going to do this then they would have come out and settled the issue by now saying that we accepted mutual funds as pledge and will continue to do the same. If they are keeping mum about this and not replying to any issues raised on this platform then they are also in trouble and don’t want to face the traders.