SEBI’s New 50% Margin Rule And What It Means For The Market


The Securities and Exchange Board of India (Sebi) announced in November that the framework for segregation and monitoring of collateral at the client level will be implemented on May 2, 2022. Following repeated appeals from parties to the market regulator, the deadline was extended to May 2nd. The rule was supposed to go into effect on December 1, 2021, but it was pushed back to February 28, 2022, and then to May 2nd, 2022. SEBI says that they are introducing this 50% margin rule for futures and options trading to limit risks in the system. This rule was proposed after a popular stockbroking company illegally used their clients’ shares as collateral against a loan. Market experts applauded the deadline extension, saying that more time would help all intermediaries prepare for the new margin rules. Since there will be a lot of changes in technology and operational processes, this extra time has assisted all intermediaries in properly gearing up. Even though the deadline is coming into effect today, several brokerage firms have implemented this 50% margin rule even before that for futures and options trader. The clauses outlined procedures for collateral deposit and allocation, collateral value, change of allocation, margin blocking, collateral withdrawal, and default management. In a recently released circular, the regulator highlighted investor interest, market regulation, and development as reasons for the postponement. Previously, investors could use their securities to completely cover their margins. However, from today, they will be required to hold 50% of the value in cash in their account as margins in order to trade in these categories. During times of strong market volatility, stress, and a bull run, this is primarily to protect investors from big swings, as well as the high risks and pitfalls of leverage. However, many people have raised concerns about the regulation's negative aspects. According to them, this can lead to a reduction in market liquidity and possibly upend the market's core price-discovery mechanism. Many brokers and traders believe that both results might have a big impact on market volumes.