SEBI Peak Margin Norms: A Draconian Measure for Protection

The author, Aaryan Kankariya, is a 3rd year law student at School of Law, Christ University, Bangalore.

The capital markets of a country are fundamental in establishing a healthy economy. They highlight investor confidence and allow companies to raise capital efficiently and cost-effectively. It is essential to recognise that the forces of demand and supply form the backbone of price discovery and are paramount in maintaining liquidity in the market. To keep the desired level of liquidity, the Securities Exchange Board of India (SEBI) has adopted a proactive stance over the years to promote trading intraday by using minimum margin requirements at the time of order execution. However, since December 2020, SEBI has discarded minimum margin requirements and has steadily begun to step up the margin required by a participant to place an order intraday.

The article seeks to highlight the growing concerns of market participants arising out of the new margin norms and their impact on price discovery. Further, a comparative analysis between the Securities Exchange Commission (SEC) and Securities Exchange Board of India (SEBI) will be carried to determine the efficacy of both countries in providing regulations for the use of margin in trading.

Peak Margins norms proposed by SEBI

Peak margin refers to the minimum margin that brokers must collect from their client before placing a trade in the cash and derivatives segment.[1] To determine the peak margin, the clearing corporations must take four snapshots of all margins, of which the highest margin will become the peak margin. SEBI has adopted a 4-phase implementation procedure of the peak margin norms, which will conclude in September with a 100% margin being required by clients to execute a trade. The rules proposed by SEBI further state that the securities held in a clients DEMAT account cannot provide margin payments.

Current Scenario

The Indian capital markets are poised to be at the forefront of investments for institutional investors. The market's activeness depends on two primary factors; growing businesses and a girth of opportunities. Individuals fail to acknowledge that opportunities are present in the market due to the sheer volume of trades executed daily. As of June 4 2021, a staggering 2,34,83,352 trades took place with a traded value of Rs. Cr. 75,411.60 on a single day tally basis.[2] While the numbers seem astounding, they have been on a downward trend post the implementation of the peak margin norms, with retail traders facing the brunt of the norms. With phase 3 of the norms being implemented from June 1 2021, brokers must collect a minimum margin requirement of 75% of the trade value. To simplify the same, if a trader wants to take a position of Rs. 1 lakh and assuming the margin required on the trade is 30%, the trader will now have to keep available 75% of the 30%, that is, Rs. 22,500 as margin with the broker. The requirement to have a 75% margin is proposed to be increased to a 100% margin by September 1 2021. Not only will this change drive out smaller investors from the market but, it will also severely impact liquidity. The rules further hamper retail investors by restricting the usage of existing securities for margin payments. These stringent margin payments can result in a fall in market participants and can severely dampen the interaction of demand and supply, thereby reducing opportunities for domestic and foreign investors.

Margin requirements in the United States of America

In accordance with regulation T of the Federal Reserve Board, a trader must maintain an initial trade margin of 50%[3] and a maintenance margin of 25% of the total value of securities.[4] Maintenance margin refers to the minimum required equity an investor must maintain after the purchase has been carried out. While the United States has established itself as the world's largest capital market in order value, it has also been able to implement more favorable margin requirements when compared to India. India currently has a 30-40% maintenance margin requirement, with the peak margin set to reach 100% by September 2021.[5] It is necessary to recognise that the US market is developed and thus can impose high margin requirements. However, the Indian market, which is still a developing market, must place a higher emphasis on providing favorable regulations to increase liquidity and retail participation.

Conclusion

With India on track to become a market leader, it is of prima facie importance to encourage market participation across all asset classes. The 4 phase margin norms being implemented by SEBI have a notable impact on volumes and can result in the exit of smaller investors. The margin norms that aim to curb speculative trading and minimize risk to smaller investors are not being fulfilled as smaller investors themselves are exiting the market. The margin norms have also had a detrimental impact on the livelihood of traders who generate income through intraday trading. The ability of such traders to place multiple orders has been severely dampened by the margin norms, causing a shortfall in profits generated through numerous trades. The current stance of SEBI on the overreaching protection of investors can significantly impact the future liquidity in the market in terms of volume of transactions. It must be explored whether the norms are fulfilling their purpose or are they resulting in a mismatch of demand and supply, which could lead to a fall in the opportunities present in the market.

[1] SEBI, Discussion paper on Margin Trading and Securities Lending [2] National Stock Exchange, https://www1.nseindia.com/products/content/equities/equities/homepage_eq.htm (last visited June 6, 2021) [3] TD Ameritrade. "Margin Handbook," page 4, Aug 10, 2020. [4] Financial Industry Regulatory Authority. "Margin Account Requirements, https://www.finra.org/rules-guidance/key-topics/margin-accounts” (last visited June7, 2021) [5] Economic Times, https://economictimes.indiatimes.com/markets/stocks/news/how-sebis-margin-rule-changed-the-equation-for-average-traders (last visited June 6, 2021)

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