Question about pledging gsecs

If someone pledges gsec with zerodha and the margin balance becomes negative due to a derivative trade, then zerodha sells the gsec to cover the debit balance. My question is that even the most liquid gsec currently- 7.26 ga 2032 has poor market depth and if it is sold, it is likely to get executed at a much lower yield when compared to the rate on rbi nds om. In many cases, there may be no buyer at all. My question is: what does zerodha do in such a situation where the customer does not bring in required funds to cover the debit balance in time and zerodha proceeds to sell the pledged security. Is there some auction mechanism to ensure that the gsec is sold at a competitive yield to minimize loss to the customer?

Hi @ron94

Firstly exchanges will have hair cut on every securities/bonds/ETFs that are accepted as collateral and compare to securities, bonds will have higher liquidity risk if broker has to exit towards obligation. In Zerodha, we have risk management check where system don’t allow to take a fresh trades in case of obligation due or cash balance is in debit and also the negative cash balance would attract delayed payment charges of 18% p.a. These measures would minimize the risk of clients carrying the obligation for longer time.

In worst case, we can place a limit order and wait for it to execute in case of no/less liquidity.

I want to understand what would happen in this hypothetical situation.
1.) I have zero cash balance and have got collateral margin from pledging securities.
2.) I have taken a trade and my cash balance goes into negative due to loss incurred in a derivative position.
If I incurred the loss on a monday, then how many days do I get before you square of my pledged security to bring the cash balance back to positive?
Do you sell the entire quantity of the pledged security or do you sell only that much quantity that covers the loss?
If I have pledged different types of securities: equities, sgb’s, g-sec’s and liquidbees, then do you have any mechanism at zerodha that you will sell a particular type of security first to cover the loss? Eg: liquidbees- preference 1, equities- preference 2, sgb- preference 3 and gsec- preference 4? Or does zerodha randomly square of pledged securities to cover the loss? Having such a system could be beneficial to the customer as he knows which pledged security will be squared off first and will have the least slippage if such a situation ever arises?

#2. We have explained the process flow here: Why were the shares I pledged squared off?

Unpledge and sell only to the extent of obligation.

Yes, our RMS will prefer least volatile or less risky instruments like ETFs, etc. to be first unpledge and sold followed by high volatile in case non-fulfillment of entire obligation.