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SEBI New Margin Circular Affect On Market (Starting mostly from Dec -2020)
Impact of SEBI circular on Margin:
In recent days SEBI has released a new Circular in regards to Margin positions.
The new changes will take place mostly from 1st December 2020.
Many people have some questions in their minds.
Some of the question which I made a note are as follows:
Will this be an End to Intraday
OR
Will this be an End to Super Leverages
OR
Will this be an End to the Discount Broker firm itself.
Now let talk about each one of them.
Firstly Intraday trading would not be ended,however, it is the most likely thing that would get affected.
Yes, Leverage's may not be the same till now one use to get astounding leverage of 30- 40 times will be getting 4-5 times at most.
Broker Firm which is running the business in the Leverages now they need to work on the facility and quality of the services otherwise other firms or to some extend standard broker firm's will be benefited.
Now let''s try to understand what is " VAR " and "ELM" because now everything is going revolve around these two variables which vary from stock to stock.
VAR + ELM
VAR: VAR is an abbreviation for Value at Risk, a financial term that is used to measure the risk of loss on a portfolio of investments.
ELM: Extreme loss margin.
Let's try to understand how this going to affect the real market with an example.
Case: XYZ Stock
Now let us assume a person “A” has 10,000 Rs. Started trading with a Broker who provides him a margin of 40 times leverage. Because of Which he can buy a lot within his investment amount. Which is Rs.10,000. Now with the SEBI rule, he needs to pay “ VAR + ELM “ Which could be around 25,000. So get ready to pay 3 times what you paying now to buy a lot of stock in an intraday.
Since we understood how it affects the Intraday traders. Now let's see what the broker firm needs to do and if they fail what happens?
The SEBI is thinking of implementing this on a quarterly basis.
Case1: December - Feb
If the broker does not collect 25% of Var + ELM upfront from the client then pays a penalty.
Case 2: Feb-April
If the broker do not collect 50% of Var + ELM upfront from the client then pays a penalty
Case 3: April-June
If the broker do not collect 75% of Var + ELM upfront from the client then pays a penalty
From SEP 2021
Fully implemented
Now let 's see the Merit and Demerit of it.
Merits: Market will be less volatile, will be in strong hands, Less or no manipulation of the market.
Demerit: Capital investment on a daily bases will be reduced, Drop-in volumes.
Conclusion:
To save small investors from those brokers who at times end up using the margin of one client to another another..SEBI is trying to make the market more reliable and more transparent.
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