Hello, I have a question about haircut deduction when pledging and what happens to the amount deducted. If 20% haircut is deducted, is that amount kept by broker and blocked away or given back to me as cash balance?
Assume I have 50k cash balance and 50k in NIFTYBEES holdings. If I pledge all of my NIFTYBEES and haircut is 20%, what will be my trading margin next day?
50k cash + 40k colletreal margin (20% of NIFTYBEES pledge taken as haircut) = 90k
Or…
50k cash + 40k colletreal margin + 10k given back as cash (haircut given back) = 100k
Basically my question is… What happens to the haircut amount deducted? Is it just lost in the blackhole and can’t be used for trading?
The haircut is set by the Clearing Corporation who provides the margins. This amount will be kept by the CC.
Take for example you go to a bank and pledge gold for a loan, the value of gold might be 2 lakhs, but the bank doesn’t provide you with a loan worth 2 lakhs, they will deduct some amount based on their risk perception and then give you the amount, say 1.75 lakhs. It is the same here.
this is correct. you will be able to trade with 90k. The remaining 10k will be with you in your demat only. Its just to cover the risk element.
Brokers will not touch, modify or trade your pledged entity without your permission. Only if you run into losses and then you cannot compensate it - the broker will ask to liquidate the pledge.
You can compare it like a car loan. For a car worth 10 lakhs, they will ask you to pay 2 lakhs cash and the rest 8 lakhs will be converted to loan. Your car is still worth 10 lakhs, but the banker has got the cash cushion of 2 lakhs to protect them in case you dont pay the emis.