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    Sebi plans uniform leverage norms

    Synopsis

    Brokerages said such restrictions could lead to dip in volumes.

    SEBI-BCCL
    Several brokerages have opted for business model involving high leverage and low fees.
    Mumbai: Traders may soon find it tough to borrow more than their capacity to bet on the market. The Securities and Exchange Board of India (Sebi) is planning to introduce uniform standards for margin funding that traders get from brokerages, said two people privy to the development. The move is aimed at clamping down on practices where brokerages allow traders to borrow much more than what they can afford, posing risks to the system.

    The capital market regulator’s secondary market advisory committee discussed the measure in its last meeting late in November and is currently working on the final touches for the law. The panel will introduce a system to bring in a cap on the maximum amount a client can borrow to trade. The volatility of the stock will also be a factor.

    “We are trying to develop a system wherein the leverage depends on both the financial credentials of the investor and the scrip in which he intended to trade,” said one of the persons cited above. “Leverage has to be low when an investor trades in contracts with high volatility. Similarly, the credentials, including net worth and financial literacy, help understand how informed decision the investor is making.”

    Brokerages allow their clients to take a position in the derivatives market by paying a fraction of the total value of the position. Typically, every brokerage has its own set of rules for calculating how much leverage each client gets. This is decided based on the relationship of the broker with client and the financial capabilities. In order to convince their clients to trade in bigger volumes, some of the brokerages, especially the smaller ones provide much higher leverage to customers.

    Sebi had pulled up at least three brokerages, including a leading discount broking firm in the last one year for providing excessive leverage to their clients. The cases involve build-up of short positions in some of the blue-chip labels during the results season.

    In one of the cases, the brokerage was providing its clients as much as 100 times leverage and this prompted several investors to take huge positions in a blue-chip auto stock. “The stock fell 7-8 per cent creating panic among investors. The brokerage almost went to the extent of a default,” said another person cited above.

    Brokerages said such restrictions could lead to dip in volumes.
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    “The development is a huge setback for brokerages, as it impacts competitiveness,” said Alok Churiwala, managing director, Churiwala Securities. “However, the move is positive from the point of view of risk management in the markets.”

    Several brokerages have opted for business model involving high leverage and low fees, as the competition in the broking industry has grown fierce in the past few years. While the top 10 players provide services for 30 per cent of the investors, discount brokerages have attracted high volume traders. This has pushed the smaller broking houses to ease margin funding rules to retain clients.

    Sebi has taken several measures in the last two years to curb excessive volatility in the F&O market, especially coming from individual investors who account for over 20 per cent of the total derivative volumes. The market regulator has already moved some of the stocks into mandatory physical delivery and is also working on a framework to link the maximum exposure permissible for a client based on his financial credentials.

    The ratio between derivatives volumes and cash market volumes in the Indian market is among the highest across both emerging markets and developed markets, according to a Sebi study.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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