Margin Collection & Reporting by Trading Member (TM) /Clearing Member (CM) in Equity Cash Segment
Margin Collection & Reporting by Trading Member (TM) /Clearing Member (CM) in Equity Cash Segment

Margin Collection & Reporting by Trading Member (TM) /Clearing Member (CM) in Equity Cash Segment

Market regulator SEBI last year came out with a set of guidelines asking brokerages to compulsorily collect certain margins upfront from their clients in the cash segment. This would then have to be reported to the exchanges. Moreover, a penalty structure was also to be put in place to deal with instances of short-collection or non-collection of margins as well as for false or incorrect reporting of margin collection from the clients by brokerages.

Margin, in market terminology, is the minimum amount an investor needs to pay the stock broker before executing a trade. This is basically part of the money collected by stock exchanges from brokerages as upfront payment, before giving them exposure to equity and commodity derivatives. The SEBI notifications frequently use the terms clearing member (CM) and trading member (TM) which in layman terms mean brokerages and stock brokers.

The capital market watchdog had taken the decision on margin collection after it discovered that some brokerages had been using a loophole in its earlier guidelines to use one client’s balance (cash or margin from pledging securities) for another client’s trades, or for the brokerage firm itself.

However, in a relief to brokers and traders, SEBI recently said penalty for short-collection will not be applicable if brokers collect at least a 20% upfront margin from the client. The market regulator made this concession after receiving representations from several stakeholders claiming that the margin collection framework in the cash segment would hurt both brokers and clients.

Moreover, the penalty provision for short-collection or non-collection of  upfront margin in the cash segment will be implemented with effect from 1st September, 2020.  The inclusion of the new rule will mean that no penalty would be applicable in cases where margin of more than 20% is collected.

In its notification, the regulator has reiterated that the Clearing Corporation will continue to collect the upfront margin from brokers and brokerages based on VaR (value at risk) and ELM  (extreme loss margin). VaR margin is related to the volatility of equities and is updated six times each day. Greater the volatility, the  larger is the VaR margin. ELM is the fixed additional margin charged. Both the margins are applied to the value of the trade and are available from the markets as a percentage of the trade value.


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