Segregation and Monitoring of Collateral at Client Level

Segregation and Monitoring of Collateral at Client Level

This has reference to SEBI circular no. SEBI/HO/MRD2_DCAP/CIR/2021/0598 dated: July 20, 2021 (“Circular”).

The date of implementation of the said circular was extended twice earlier.  We were hoping that it will get further extended, but this time, no extension is provided as of now.

So that said Circular is effective from 02-05-2022.

Based on the circular, SEBI mandates 50% of the margin required (when trading futures and selling options) to be maintained in cash or cash equivalent.

Let's see what is cash equivalent means:

Cash equivalent shall include FDRs, bank guarantees (as specified below), Government securities and units of the schemes of liquid mutual funds or government securities mutual funds (by whatever name called which invest in government securities).

As a trader, here are my recommendations for the 50% cash or cash equivalent:

1. At least 40% of your portfolio should be in the form of a cash equivalent.  I will recommend using LiquidBees or liquid mutual funds or FDRs. 

2. Remaining 10% should be in cash to manage day-today MTM, so as to avoid un-pledging.

3.  Avoid trading above 80% of the total margin (cash + cash equivalent + pledged stocks) available.

4.  In case pledged stocks value increases, you might have to add more cash equivalents.

At the time of settlement of client’s funds (SEBI Payout) (monthly/quarterly, as the case may be), make sure funds are transferred back before you take large positions.

Possible impact on option trading:

1. Many more may shift to buying, so it may increase premiums. 

2. For a very short duration, the options volume may reduce marginally, but later on, it will be back to the same momentum.