Quarterly Settlement Payout - Account in debit

[Dorkstar1]

@siva @VenuMadhav @Nakul @Prayag

Yday, Zerodha transferred back the credit in my trading ledger back to my Bank account. When I called the call center, they said Quarterly Settlement is done on my Account. I had open positions and considering the margins in my account for such carry forward positions, my account balance went negative. Why did Zerodha let my account go into negative balance? Will I be charged any penalty/interest for this? I don’t want to pay any because Zerodha voluntarily transferred this money back without me asking for it.

[VenuMadhav]

@Dorkstar1

Quarterly Settlement is done on my Account.

Hey, this is indeed done as part of the Quarterly Settlement.

Let me explain:

Basis what you’ve explained, I’m guessing you’ve also pledged stocks with us for margins. SEBI recently amended the rules around Quarterly Settlement which affects the way we settle clients who have also pledged securities.

If you’re aware, all brokers insist that 50% of the margins for your positions come in the form of cash and 50% in the form of collateral. So, in the usual case, if you’re holding one lot of Nifty Futures position for which margin of 1.1 lac is required - 55,000 has to be in the form of cash and the other 55% in the form of securities. Earlier, while doing the Quarterly settlement, we would release cash only to the extent what’s excess after applying the 50:50 logic.

So in the above example, if you had a cash balance of Rs.80,000 and collateral worth Rs.1,25,000, the excess cash in your account would be calculated as under:

(80,000 - 50% of Rs.1,10,000) = Rs.25,000. As such, we’ve would have released only 25,000 to your account.

However, SEBI in the new circular said that all the margins have to first be charged from collateral and only if the collaterals are short, charge margins from cash. I’ve highlighted the relevant bit from the SEBI circular.

Considering the same example above, we’d have to now adjust the entire margins from collateral, since there’s enough collateral (margin needed for position = Rs.1,10,000; collateral available = Rs.1,25,000). Applying the new rules, the entire 80,000 cash in your account would have to be transferred back.

It’s for this reason your account has gone into a negative balance. However, please note that there would be sufficient margins available in your account (in the form of collateral) to cover for your position, hence no margin penalty would apply. However, since the 50-50 cash-collateral ratio is imbalanced, you’ll have to ensure you transfer funds back the subsequent day in order to not get any interest charged for the cash shortfall.

[rvenkat24]

Hi Venu,

Thanks for a detailed write-up on this issue, you have explained it very well! The same issue had happened with my account as well last week where I had open F&O positions (Both buy and sell) with pledged securities for margin and my entire cash balance was settled by Zerodha, resulting in negative cash balance on the subsequent day after the market opened.

I still have a query and I would like to quote the last few lines from your response as they seem to be slightly contradicting

“However, please note that there would be sufficient margins available in your account (in the form of collateral) to cover for your position, hence no margin penalty would apply. However, since the 50-50 cash-collateral ratio is imbalanced, you’ll have to ensure you transfer funds back the subsequent day in order to not get any interest charged for the cash shortfall”

As per the new circular, if SEBI insists of settlement of the entire cash in the account if there is enough margin through pledged collateral, where does the requirement of 50-50 cash collateral ratio comes from? My view is simple - if SEBI says that margin from pledged collateral is sufficient for open positions, the requirement of 50% of the margin through cash should NOT be enforced and interest should NOT be charged for the cash shortfall. If this is not possible, then my view is that the entire cash portion should not be settled.

Awaiting your response on this.

Thanks,
Venkat

[VenuMadhav]

@rvenkat24

where does the requirement of 50-50 cash collateral ratio comes from

At the Clearing Corporation level, the margins are still blocked in the 50-50 ratio. This has always existed and will continue to; here’s the reference for the same:

https://www1.nseindia.com/products/content/derivatives/equities/margins.htm

@rvenkat24

if SEBI insists of settlement of the entire cash in the account if there is enough margin through pledged collateral

So the options given are:

(a) cover for all margins through available collateral and release cash

(b) If broker wants to maintain the 50-50 ratio, then unpledge securities to the extent that is required

(b) is complex, tedious and time consuming for both the broker and the client, which is why prefer doing (a). However, on the day, the cash is paid out to the client as part of settlement, the CC would still block the broker funds to the extent of cash needed for outstanding positions. Although for a day, we would be blocking our own cash margins, we won’t be charging interest to the client. The client is required to bring back the funds the subsequent day. Cash rich brokers can afford to do (a), else will have to resort to doing (b).

[rvenkat24]

Wow! Whoever puts together these circulars at SEBI So much operational complications and more importantly lack of common-sense!

@VenuMadhav

(a) cover for all margins through available collateral and release cash

In my view, (a) should have been "Cover for all margins through available collateral plus cash (in 50-50 ratio) and release the balance cash.

@VenuMadhav

(b) If broker wants to maintain the 50-50 ratio, then unpledge securities to the extent that is required

No comments on point (b). Even with my little knowledge, I would surely not have written this

Thanks again for a brilliant explanation, Venu!

Regards,
Venkat

[rvenkat24]

@VenuMadhav

However, on the day, the cash is paid out to the client as part of settlement, the CC would still block the broker funds to the extent of cash needed for outstanding positions. Although for a day, we would be blocking our own cash margins, we won’t be charging interest to the client. The client is required to bring back the funds the subsequent day

Hi @VenuMadhav

I am glad that Zerodha is taking this approach of not charging interest for a day in cases where entire cash is settled. My suggestion would also be to trigger a notification (email + kite) for accounts with open positions requiring cash margin (for 50% coverage), to make the cash portion in the account good within one day.

I am saying this because when my account got settled last week, I came to know about it only the Funds credited SMS that I received from my bank at 7 am in the morning. Although clueless, luckily I checked the funds section on Kite and acted upon it immediately but a nudge would help!

Thanks again,
Venkat