Institutional trade to have margins too

Move in cash market from April 21.

The Securities and Exchange Board of India (Sebi) on Wednesday said broking houses will have to provide for margining for all institutional trades in the cash markets with effect from April 21. The move brings institutional business on par with the retail segment.

At present, there is no margin system for institutional trades while brokers charge margins from retail customers for their trades.

"In order to provide level playing field to all the investors in the cash market as in the case of derivatives market, all institutional trades in the cash market would be subject to payment of margins as applicable to transactions of other investors," said a Sebi circular issued on Wednesday

In the futures & options segment, there is margining system for both retail and institutional trades.

The margining decision coincides with Sebi's decision to allow short selling, and securities lending and borrowing with effect from April 21. Brokers said the move was necessary as at present all the trades in the cash market by the institutional investors are delivery-based trades.

Following the implementation of short selling from April 21, brokers, as part of their risk mitigation exercise, need to provide for margins as the institutional trades may also be short selling in nature. Hence, the extra precaution.

The decision to impose margins for institutional trades will have a major impact on the trading volumes of small and mid-rung broking houses.

"We will have to provide for the margins ourselves to attract institutional trades," said a head of a brokerage house. "Only big brokerage houses, which have big money, will survive in the new environment," he said.

Sebi said to begin with, all institutional trades in the cash market would be margined on a T+1 basis with margin being collected from the custodian upon confirmation of the trade. Subsequently, with effect from June 16, 2008, the collection of margins would move to an upfront basis.

The market regulator asked stock exchanges to test the software and remove any glitches in its operation well before the commencement date to avoid any problems in the live environment.

Also, stock exchanges are required to make necessary amendments to relevant bye-laws, rules and regulations for the implementation of the new rules.