SEBI defers 50:50 - Margin Rules for Derivatives

In 2020, SEBI had introduced new margin rules for intra-day traders wherein the stockbrokers would mandatorily collect the minimum margins upfront from the clients for taking a leveraged position in the equity market. SEBI has now come up with another amendment in margin rules for derivatives under which the traders need to give 50% margin upfront for taking a position in the derivatives market. The rule was expected to be implemented on 1st December 2021. However, Sebi postponed it to February 2022 stating investor interests and market regulations and development.

Earlier, traders willing to take a leveraged position in F&O and credit default swap (CDS) segment could do so against 100% securities. However, according to the new rules, traders must now keep a minimum of 50% cash in their account to take a new position and the remaining 50% can be leveraged against the securities.

Let’s understand this with an example –

Assume a trader wants to take a new position in the derivatives market wherein he requires a minimum of Rs. 10 lakhs. Now assuming he has Rs. 10 lakhs of securities in his Demat account, he will keep these as collateral against the new position. This is called 100% margin. But according to the new rule by SEBI, the trader must mandatorily keep 50% cash in his account i.e., an amount of Rs. 5 lakhs, to be able to take this position. The balance 50% margin can be collateralized against his securities.

We all know 2020 has brought a wave of new investors into the market. This has increased the liquidity and volatility in the market. To protect investors against massive swings, high risks and negative consequences from leverage due to high volatility and bull run phases, SEBI has introduced this 50:50-margin rule for F&Os and CDS. Implementation of this rule will impact retail traders adversely and discourage them from taking leverage positions. This will reduce the liquidity in the market and significantly impact market volumes.

Thank you.

Regards,

Hritika More (Section R),

Kautilya,

IBS Mumbai.