SEBI’s drive to clean up the capital market continues
Here is the latest circular in which SEBI proposes to the mechanism stockbrokers use to offer margins to clients against pledged demat holdings.
What changes from July 1st?
Pledging of securities
Currently, when a customer pledges security as margin for F&O, the securities move to the broker and through the broker to the clearing corporation (SEBI had, a few months back, disallowed these securities from being pledged with NBFCs). Once with clearing corporation, the margins after haircut are provided to the customer.
In the new structure, the securities remain in the client demat, but a pledge is marked in favour of the broker (Trading Member ™) who in turn pledges to the Clearing Member (CM) and in turn with Clearing Corporation(CC). For this pledge to be marked, the customer will need to authenticate the transaction using an OTP.
If you are trading at Zerodha and are currently pledging securities as margins to trade F&O, you will soon need to authenticate that pledge using an OTP. Life doesn’t change for us or our customers apart from this.
MTF or Margin funding
Today, brokers allow you to buy securities worth more than the money in your trading account under margin funding. For example, if you had Rs 1lk in your account, a broker might allow you to buy say Rs 4lks of Reliance shares. These shares will not be credited to your demat account until the full amount is paid. The broker would charge interest on the Rs 3lks lent for this transaction. The shares would remain in the broker’s client pool account until they are fully paid for. But with this new circular, it seems to say that the securities will have to go back to the client account and then be pledged as margin.
The issue with this is that there is no guarantee that the client will go through the OTP authentication to pledge after the shares are credited to the client demat. And the client thus assumes ownership of all shares while they are still not fully paid for. We will have to wait for some clarity on this.
Update 26th Feb: If securities are not fully paid, the broker will be able to hold back the security in a dedicated pool account. So MTF will continue the way it works currently.
At Zerodha, we haven’t enabled margin funding yet, so nothing affects us. We will try to launch this in the next couple of months.