Sebi, exchanges may raise margins to curb volatility
MUMBAI: The markets regulator and exchanges are considering sharply raising collateral or margin requirements for trading in some stocks as they attempt to curb the extreme volatility in the market, two people with direct knowledge of the discussions said.
Anticipating a spike in volatility, the Securities and Exchange Board of India (Sebi) said in the last week of February that for securities with intraday price movement of more than 10% in underlying market for three or more days in the past one month, minimum total margins will be equal to the maximum intraday price movement of the security observed in the previous one month. Margin trading refers to the practice of traders using funds borrowed from a broker to trade a financial asset, which forms the collateral for the loan. Margin trading allows traders to buy more securities than they would be able to normally.
“The regulator and exchanges have assessed that the downward spiral and volatility may continue given the current spate of economic uncertainty due to the Covid-19 outbreak. So, the higher margin requirements at gross client level will likely continue till things settle down,” said one of the two people, both of whom requested anonymity.
Another proposal Sebi is considering is to double the margins for short-selling, the people cited above said. However, Sebi and exchanges are not in favour of banning short-selling, the people cited above said. Often cited as a key reason for volatility, shortselling is the act of selling a stock that the seller does not own at the time of trade. It may be done by borrowing the stock through clearing corporations and clearing houses of a stock exchange and in India, these trades must result in delivery.
“The regulator and exchanges are not in favour of a ban on shortselling as the data does not support its effectiveness. In jurisdictions such as the UK, Spain and Italy where short-selling was banned recently, volatility increased post the ban. Only in Korea volatility reduced marginally,” said one of the two people quoted above.
Having said that, foreign portfolio investors (FPIS) hold net shorts of 120,000 contracts, according to exchange data.
“The regulator is extremely concerned with market manipulation that may be perpetrated by buyers or sellers, including short-sellers, and is prepared to take timely action to curb such practice. While international regulators believe that short-selling can increase market falls, there is another school of thought which recognises it as legitimate investment activity,” said the first person.