Stock brokers face a margin pressure of about Rs 3,000-5,000 crore as a result of buying frenzy in the markets today which led to benchmark indices Nifty and Sensex hitting the 20 per cent upper circuit. Moreover, the National Stock Exchange (NSE) today increased its Value at Risk (VaR) and SPAN margin applicable on stock and index futures by nearly 30 per cent and 80 per cent, respectively, adding to the brokers’ woes.
VaR margin is the maximum loss that a trader is likely to incur in a stock during a certain period. Based on this, NSE imposes the margin and the money is collected from stock brokers. It is applicable for all securities in rolling settlement, which are classified into three groups. SPAN margin, which is similar to VaR margin, is applicable for Nifty futures.
According to data, open interest positions worth nearly Rs 30,000 crore were there in the market last Friday. Of this, approximately 40 per cent were short positions. Since the markets went up by 20 per cent, the brokers, who had short positions of clients on their books will have to shell out 20 per cent additional margin, which comes to around Rs 2,500 crore, to the exchanges.
Brokers, in turn, would be seeking to raise these funds from their clients, either to pay the margin or ask to him ask square off positions. Apart from this, there was an open interest of 691,000 puts in the option segment, the approximate value of which could be around Rs 2,000 crore. Buying a put option simply means going short on markets. The markets were traded slightly over a minute today before Nifty hit a 20 per cent upper circuit and trading was suspended. The total combined volume of cash and futures segment during this time was a mere Rs 3,000 crore, making it impossible for short sellers to unwind their positions.
Due to this sharp rise, the NSE had to increase some of the other margins depending on their risk management system. While the average VaR margin, which was around 24 per cent, has been increased to 31 percent, the SPAN margin on Nifty has significantly gone up from 10 per cent to 19 per cent. “The margin pressure is there but there is not crisis this ti me, unlike when thee market-to-market (MTM) margin is triggered during sharp market falls," said Amit Majumdar, director (business strategy), Angel Stock Broking.
Majumdar is of the view that most brokers should be able to manage this margin with ease as portfolio value of stocks, which was taken as margin, has gone up by over 50 per cent.
When the markets open tomorrow for trade, it is likely that terminals of many brokers, where short sales were higher than long positions, would be on a square-up mode.
Experts said apart from a few top foreign institutional investors (FIIs) who had short-sold nearly 4 million Nifty futures last week, it was mainly a large number of retail and high net worth individuals who were trapped. Experts said brokers, too, were allowing retailers to go short on markets as they felt that stock prices had peaked and there would be some correction. There were at least 12 sell reports by top brokerage houses available in the market till the last week.