SEBI to introduce Client ID norms and gross margin systems

NetScribes/Janaki Krishnan

Brokers are in for a higher margin regime once the Securities and Exchange Board of India puts its client ID norms in place. This will also ensure that clients pay a part of the margin imposed, thus minimising the risk.

At present, daily margins are imposed on the broker's net outstanding position at the end of the day. In order to mitigate the risk, stock exchanges also impose other margins such as mark-to-market, special and additional margins, all on a net outstanding basis.

For instance, if a broker buys 100 shares of Reliance and sells 50 on a particular day, under the current system he would have to pay margins on the "net" 50 shares. Once the new system is in place, margins will be calculated on the "gross" 150 shares traded. The new system could result in a higher margin payout -- only it will now be distributed between the broker and the client

The ID norms for investors will also ensure that brokers do not play around with their investors's accounts and, more importantly, that the onus of paying up margins does not rest entirely on the broker but on the client as well, thus spreading out the risk.

Once the client IDs are in place, the brokers will have to confirm to the exchange (with relevant proof) that the clients are indeed paying up the margins. At present, the client-broker agreement is based largely on trust and clients rarely make margin payments. Clients do have separate account numbers and brokers are expected to ensure that the sanctity of their accounts and the clients's accounts are maintained. This is done mainly to discourage brokers from misusing their clients's accounts.

Recently, there was an uproar over accumulated balances (of securities) in brokers's clearing pool accounts at the National Securities Depository Ltd. These balances did not match with their actual trades. This led to allegations of brokers misusing their clients' accounts (with the latters's tacit approval) for their own benefits.

The client ID mechanism will actually put a stop to this practice as all transactions will necessarily have to be ID-driven and, therefore, authenticated. With proper client IDs in place, SEBI can now shift to the gross margin system, where margins are imposed on the basis of gross positions, which is a much simpler method.

The rapidly evolving nature of the stock markets (dematerialisation, derivatives trading, Internet trading) requires the regulator to keep pace and its initiatives can only serve to make the trading climate as painless and as efficent as possible for both brokers and investors.

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