'Leveraged trades can become a worrying factor for the markets'

Sebi peak margin norms: It may have some impact on the mid-and small-cap stocks, Deven Choksey says

As the SEBI's new peak margin requirement norms kick in on September 01 where 100 per cent upfront margin payment would be required for initiating even intraday positions, DEVEN CHOKSEY, managing director at KR Choksey Investment Managers, tells Nikita Vashisht in an interview that while Sebi may have achieved the purpose of tightening the screws on trading activity, the cost of trading may go up. Edited excerpts:

Do you see the new margin rule impact trading in any way?

I do not think the new rule is not understood by the traders. They very well understand the implications. As the rules keep on tightening, it will only increase the cost of trading. There will be a number of people who have to leverage while trading for the kind of margin that is now required. This will burden the system and increase the cost of funds as well. While Sebi may have achieved the purpose of tightening the screws on trading activity, the reality of the matter is that the cost of trading may to go up.

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So how does all this get reflected in the daily trading activity then?

Well, it has to reflect somewhere. Either it will increase the leverage – people will borrow to invest and make up for the margin requirement – that is outside the purview of the market regulator Sebi. This could eventually become a problem. In my view, while solving one problem, another bigger problem is likely to get created. It is the duty of the market regulator to look into that aspect as well.

Will Sebi relent and give some relaxation over the next few months if such leveraged trades are spotted?

I do not think so. Sebi is managing one side of the risk, which is to curb speculative activity, the other side (leverage-related risk) will open up. The leverage business, I believe, comes under the purview of the Reserve Bank of India (RBI) and Sebi does not look into such matters. Ultimately, leveraged trades can become a worrying factor for the markets.

Will there be a significant impact on buy today, sell tomorrow (BTST) trades?

It will only increase the cost of funding. People / traders who are used to this market segment may again resort to leveraging and create a problem. To that extent, their trades will get impacted. That said, it may also act as a deterrent for BTST trades. Ideally, Sebi and RBI should work together and create a leverage market in the same system, which has been a long-standing ask of the trading community. Leveraging should not happen outside the market, but should be within the contours of the market. If it happens within the contours of the market, we will be able to ascertain the amount of risk the market and the trades are carrying.

Will trading volume get impacted as a result?

Initially, it may have some impact on the mid-and small-cap stocks. However, it will settle down as trade progresses; and investors, traders and brokers come to terms with the new arrangement.