Volumes sustain in September despite new margin, share pledge norms

Cash market average daily turnover value stood at Rs 58,700 cr last month

The cash market turnover remained strong in September despite the introduction of norms on new margin collection and share-pledging by the Securities and Exchange Board of India (Sebi). 

The average daily turnover value (ADTV) in the month stood at Rs 58,697 crore, down 10 per cent month-on-month (MoM) but up a sharp 47 per cent year-on-year (YoY). 

Many market participants had feared the new upfront margin collection norms, coupled with the disruption caused by new margin pledge and re-pledge norms, would make a dent in trading volumes. Market players said after some teething issues, the new system stabilised within days, which helped sustain volumes. Also, the continued buoyancy in the market contributed to y-o-y growth in trading turnover. Activity on the derivatives side was particularly strong with the ADTV seeing a jump of 16 per cent MoM and 50 per cent YoY.

To curb misuse by brokers, Sebi did away with the erstwhile practice of obtaining power of attorney (POA) from their clients to access their account. Instead, it introduced a system that allows clients directly to pledge and re-pledge their holdings with brokers for generating margins. 

Now when clients have to generate margins to trade, they are directed to the webpage of the depository. After OTP authentication, clients will be able to see their holdings, which can be pledged or unpledged with the broker to generate margins.

Besides the new margin norms, Sebi also tightened the upfront margin norms. Under this, brokers had to collect higher margins, which is linked to an individual stock’s value at risk (VAR) and extreme loss margin (ELM). The two differ from stock to stock and are not linked to volatility or liquidity. Further, bourses were directed to levy heavy penalties on brokerages for not collecting margins.

This new system became effective on September 1. Most brokerages had reported huge drops in volumes during the initial days because the new system was marred with glitches, which resulted in margin shortfalls and delays in pay-in and pay-outs.

However, clearing corporations and depository worked overtime to iron out the issues.

“The new margin system has forced brokers and investors to shift to a new paradigm. On one side, it has the luxury of margin to the favoured client, which ultimately affected volumes. On the other hand, it has able to give priority to investors who don’t want the excessive margin to invest in the market,” said Vishal Wagh, research head, Bonanza Portfolio.

Industry players say the real impact on volumes will be felt when Sebi’s restrictions on brokers providing excess leverage for intra-day trading come into effect.

“Upfront cash margins from September 1 were never going to hurt trading volumes once there was clarity that a margin wasn’t required to sell holdings and also the delivery volume is less than 5 per cent of the turnover. What’ll hurt volumes and brokers is the restriction on intra-day leverages,” said Zerodha Founder and CEO Nithin Kamath in a tweet.

Wagh concurred that “once the intra-day margins get introduced a further reduction in volume can be seen”. These norms will be implemented in three phases from December, where brokers will be penalised if the margin to clients is more than 25 per cent of the sum of VAR and the ELM. From March 2021 and June 2021, they will be penalised if the margin exceeds 50 per cent and 70 per cent of the sum of VAR and ELM, respectively. From August 2021 onwards, brokers will be penalised if the margin exceeds the sum of VAR and the ELM.