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50% cash margin leaves derivative traders in lurch – BusinessLine

A large number of stock brokers have started demanding 50 per cent cash margin from traders in India’s equity derivatives market as against the regulatory requirement of 20 per cent. Traders say it was causing unnecessary hassle to them in trading in the futures segment as the 20 per cent margin requirement was enough to take care of any volatility risks.

Of late, markets regulator SEBI has tightened margin norms, hiking the margin requirement. However, since the market has been hitting a new peak this year, brokers have turned extra cautious, experts said. Brokers have unilaterally started imposing penalties on traders who do not maintain 50 per cent cash margin for trading in the F&O segment. The penalty includes a 9 per cent interest per annum on the cash margin shortfall.

Sharp volatility

An official from a Mumbai broking firm said that they were fearful since retail participation was rising sharply than before in the derivatives segment. “We insist on a 50 per cent margin to curtail retail traders from going overboard with derivatives trading since markets are hitting new highs and sharp volatility can lead to debt pile-up,” the official said. F&O trading is growing in unprecedented manner since scores of new stocks have been inducted into the segment by the National Stock Exchange.

According to the latest NSE data, retail investors hold 68 per cent of overall index long calls and index short call options, 55 per cent and 71 per cent of index long put and index short put options positions, 57 per cent of index long futures and 41 per cent of index short positions, 56 per cent of stock futures long and 7 per cent of stock futures short positions.

Girish Sodani, Head of HNI zone and strategies, Swastika Investmart, said, “Yes, we have observed that in our zone, many of our small-ticket clients who are into day trading have shifted from the cash and futures segments to options trading as the latter require very low margins; but these margins upfront make a big fireback to the traders who trade smoothly in options trading.” In the past one year, SEBI introduced several new norms regarding margin and pledge of shares including upfront margins but reduction in options leverage and cash margin on option trades prove to be hard on low investment customers and brokers, he added

Margin commitments

Traders say clients will face difficulties in meeting margin commitments towards the end of every quarter, as according to current SEBI rules, all client positions have to be settled and cash in their ledger account has to be returned to them. If a trader has option position based on cash, they may have to forcefully square-off their position, they added. An important relaxation is the quarterly settlement as it affects derivative traders, Sodani said.