Mar 28, 2008
Ashish Rukhaiyar & Gaurav Pai
MUMBAI
IN AN attempt to boost the securities lending and borrowing mechanism, stock exchanges are considering a proposal where market participants may not have to pay the whole margin upfront. Internationally, players have to deposit cash (or some equivalent) equal to, or slightly higher than the amount of shares borrowed. A stock exchange official said, to begin with, this may be restricted to roughly around 40% of the worth of securities.
Recently, capital market regulator Sebi had asked stock exchanges and depositories to put in place a screen-based system for implementation of the stock lending and borrowing mechanism by April 21. However, most players are awaiting further clarity or details on the scheme.
One of the most-awaited clause is the amount of cash (or equivalent called as margin) that participants have to pay upfront. If this is fixed at 40%, it would mean that for a crore of stocks borrowed from the exchange window, only Rs 40 lakh will have to be kept with the exchange (or more accurately its clearing house) as the deposit.
Once these borrowed stocks are returned within seven days, the deposit would be returned and only the pre-fixed interest will be paid to the lender. This, of course, if the contract for borrowed securities is not ‘rolled over’. The official further explained that the 40% initial margin will have, among others, 10% value at risk (VaR) and 5% extreme loss margin, (ELM), among others.
However, for a person who wants to bet against a rising share by selling it, the futures & options segment is likely to be a cheaper bet than the cash market. While selling futures on a stock, one has to pay only a fifth of the total exposure as initial margin. However, the mark-to-market transactions are likely to be calculated in both scenarios.
The market is no stranger to the lending borrowing mechanism. After Sebi reintroduced Badla in 1996, NSE had introduced the Automated Lending and Borrowing Mechanism (ALBM), which was soon followed by the BSE’s Borrowing and Lending of Securities Scheme (BLESS). Both were essentially sophisticated forms of badla.
However, once derivatives was introduced in 2000, ALBM and badla were banned as it was felt that the purpose of leverage was well served by individual stocks futures. “Given the considerable similarities in software requirements between the proposed securities lending mechanism and the old ALBM system, I would think that the exchanges should not need more than 2-3 weeks to get this off the ground,” JR Verma of IIM-A had said recently.
Saturday 29 March 2008
Brokers to give daily margin info to clients
Mar 24, 2008
Ashish Rukhaiyar
MUMBAI
MUMBAI
STOCK BROKING firms will have to notify clients about their (the client’s) daily margin positions from April 1, according to a Securities and Exchange Board of India (Sebi) directive. The move follows a spate of complaints from investors that brokers have been liquidating their positions citing insufficient margins, even though their margin accounts had enough funds.
The other common complaint is that investors are not aware of the quantum of margin money that had to be deposited to replenish the account. Such complaints could soon become a thing of the past once the new rule is implemented. During a free fall — as was seen during January 2008 and in May 2006 — brokers promptly square off clients’ positions, at times, it is claimed, not giving them adequate notice.
Often, it is alleged, brokers use the funds of their least-preferred clients to meet the margin commitments of their high-volume customers. The market regulator is of the view that if investors are informed about their margin positions on a daily basis, it would become easier for them to replenish the dwindling margin.
It’s a tough call for brokers
“IF informed on a daily basis, investors can see when their margin positions are approaching dangerous levels,” said a source. This would minimise instances of brokerages liquidating client positions for want of margins, he added. This will help investors who trade frequently in the derivatives and/or the cash market and who operate by keeping open positions.
However, there seems to be a slight confusion as to how brokerages will inform their clients about their margin position. While some say the additional information would be made a part of the digital contract note, there are others who say that a separate note (about margin position) would be mailed to all the clients everyday.
“We believe that the digital contract note has to include the margin position from April 1 onwards,” says Angel Broking’s executive director Amit Majumdar. “The software programme needs to be changed so that it goes back to the ledger to pick up the margin position. This might slow down the process resulting in a printing delay,” adds Mr Majumdar who heads the operations, finance and alternate business of the broking outfit.
In a similar context, the operations head of another domestic brokerage said that “they would now start issuing a separate margin statement” as the “circular does not specify the method of communication”. “Our clients will be aware of their margin positions before the markets open the next morning,” he added.
While Sebi wanted to implement the new regulation from February 18 onwards, brokers sought an extension of the deadline saying they needed more time to complete the back office software modifications for providing the additional information to their clients on a daily basis. Curiously, the stock exchanges came out with a circular only on February 11 asking brokerages to inform clients of their margin positions from February 18 onwards.
The Association of NSE Members of India (ANMI) wrote a letter to Sebi on February 14 asking for an extension until April 1. Incidentally, ANMI, in its letter, also asked the regulator to permit members to use the SMS facility to inform clients about their margin positions.
The brokers’ body was of the view that using SMS for informing “the clients total margins on T (trading) day and change from T+1 day” would “save time and providing of information will be near instantaneous”. Brokers can provide the balance of the required information on the foot of the contract note after required software modifications are completed, added the letter. However, Sebi has still not responded to the SMS query.
Foreign funds take shelter under 'warehousing' deals
Park Their Shares With Other Market
Participants As Further Fall Seen
Mar 21, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
HUGE blocks of shares continue to change hands amid volatile market conditions. Nothing unusual about that. Except that quite a few of those “block deals” could be “friendly transactions”, as foreign fund managers try to minimise the haemorrhaging of their portfolios.
A section of the market players alleges that these are warehousing deals which will be reversed at a later date. But some others feel the deals are a result of creation of new sub-accounts after the Sebi diktat on participatory notes (P-notes). Experts also add that after the Bear Stearns episode, such transactions have been on the rise.
Dealers say that foreign funds have taken to temporarily parking their shares with other market participants due to the prospect of further fall in share prices and investors abroad asking for their money to be returned. There is always a prior understanding of the price of sale and the subsequent price of buyback, they add.
The entity ‘warehousing’ shares is usually another foreign fund or an institution holding a participatory note. Brokers also suggest that certain promoters are also a part of this operation.
For instance, if fund A is holding shares of company B in its portfolio, then A will park those shares in some investment company indirectly controlled by B. At times, the promoters agree to such deals, else the erosion in market capitalisation would be severe if fund A decides to sell those shares in the market.
“If they (funds) stick to their shares, there is a chance that prices will fall further,” says Biranchi Sahu, head of institutional equity at. “Naturally, some of the FIIs are shifting their shares to other FIIs or P-note entities with an understanding that these will be brought back later,” he adds.
In some instances, the fund is not able to sell the shares in the market because that stock is hitting the lower end of the circuit filter. At the same time, because of the steady slide in the stock price, the fund’s net asset value gets eroded. To prevent this, the fund enters into an agreement with another institution to buy those shares temporarily. The transaction will be reversed when market conditions improve. They would compensate the entity (who is buying the shares) through some means, mostly monetary.
However, Centrum Stock Broking managing director Devesh Kumar feels, “This could be because of conversion of P-note holdings into sub-accounts.” He says that when investors get a sub-account with a new entity, they tend to “transfer their earlier holdings to the new account”.
FIIs have invested over Rs 3,000 crore in the period between January 15 and March 17, but have also sold shares to the tune Rs 16,000 crore. During the period, the Sensex tanked 5,400 points to end at 14,809 on Wednesday.
Participants As Further Fall Seen
Mar 21, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI
HUGE blocks of shares continue to change hands amid volatile market conditions. Nothing unusual about that. Except that quite a few of those “block deals” could be “friendly transactions”, as foreign fund managers try to minimise the haemorrhaging of their portfolios.
A section of the market players alleges that these are warehousing deals which will be reversed at a later date. But some others feel the deals are a result of creation of new sub-accounts after the Sebi diktat on participatory notes (P-notes). Experts also add that after the Bear Stearns episode, such transactions have been on the rise.
Dealers say that foreign funds have taken to temporarily parking their shares with other market participants due to the prospect of further fall in share prices and investors abroad asking for their money to be returned. There is always a prior understanding of the price of sale and the subsequent price of buyback, they add.
The entity ‘warehousing’ shares is usually another foreign fund or an institution holding a participatory note. Brokers also suggest that certain promoters are also a part of this operation.
For instance, if fund A is holding shares of company B in its portfolio, then A will park those shares in some investment company indirectly controlled by B. At times, the promoters agree to such deals, else the erosion in market capitalisation would be severe if fund A decides to sell those shares in the market.
“If they (funds) stick to their shares, there is a chance that prices will fall further,” says Biranchi Sahu, head of institutional equity at. “Naturally, some of the FIIs are shifting their shares to other FIIs or P-note entities with an understanding that these will be brought back later,” he adds.
In some instances, the fund is not able to sell the shares in the market because that stock is hitting the lower end of the circuit filter. At the same time, because of the steady slide in the stock price, the fund’s net asset value gets eroded. To prevent this, the fund enters into an agreement with another institution to buy those shares temporarily. The transaction will be reversed when market conditions improve. They would compensate the entity (who is buying the shares) through some means, mostly monetary.
However, Centrum Stock Broking managing director Devesh Kumar feels, “This could be because of conversion of P-note holdings into sub-accounts.” He says that when investors get a sub-account with a new entity, they tend to “transfer their earlier holdings to the new account”.
FIIs have invested over Rs 3,000 crore in the period between January 15 and March 17, but have also sold shares to the tune Rs 16,000 crore. During the period, the Sensex tanked 5,400 points to end at 14,809 on Wednesday.
It's just business: BSE goes long on A'bad comex
BSE Might Have Paid A Significant Amount
For 26% In NMCE, But It Can Dilute The Stake Later
Mar 15, 2008
Ashish Rukhaiyar & Gaurav Pai
MUMBAI
THE news of Asia’s oldest stock exchange acquiring a substantial stake in the Ahmedabad-based National Multi Commodity Exchange (NMCE) may have come as a surprise to many. To those in the know, it was a pure financial move by the Bombay Stock Exchange (BSE) in that it may prove to be a multi-bagger going forward when some financial bigwigs enter the commodity arena.
Recently, the BSE bought a 26% stake in NMCE for an undisclosed amount of money. People familiar with the deal say that the stock exchange had to shell out around Rs 40 crore for the stake, valuing the comex at around Rs 150 crore.
“BSE is of the firm belief that going ahead, others would be interested in acquiring a stake in NMCE. At that time, it would have an option of diluting a part of its stake and that too at a premium,” says a source.
It is clear that the stock exchange would not be involved in the daily working of the comex. BSE members would also not be automatically eligible for NMCE memberships. They would have to submit a request to the Forward Markets Commission (FMC).
BSE is said to have tried its luck with MCX but steep valuations were a hindrance. Also, the National Stock Exchange has a small stake in the exchange. It is also said that the timing of the deal has a lot to do with the forthcoming public issue of Multi Commodity Exchange (MCX) that is being valued at over $1 billion.
BSE knows that if it enters the arena at the right time at the right price, then going ahead it would be able to net a cool gain, said the official. Similarly, NCDEX was out of the question since NSE is one of the largest shareholders with a 15% stake in it. This brought NMCE, a strong player in agri commodities, into the picture. NMCE occupies the third slot among the leading commodity exchanges of the country. The daily average turnover of the Ahmedabad-based exchange is around Rs 500 crore.
“BSE’s larger counterpart (National Stock Exchange) already has a presence in the commodity market via NCDEX,” said an official. In his view, it was only a matter of time before BSE took a stake in one of the leading commodity exchanges. “BSE does not have a commodity licence and FMC would not give a new one. So, the only option was to acquire a stake in any of the three leading commodity exchanges,” added the official.
FMC norms stipulate that a single domestic investor cannot be given more than 26% stake in a commodity exchange. In the case of foreign investors, the limit has been capped at 5%. While the stake would make BSE eligible for a board representation, it is believed that the stock exchange would ask for two representations on the NMCE board.
For 26% In NMCE, But It Can Dilute The Stake Later
Mar 15, 2008
Ashish Rukhaiyar & Gaurav Pai
MUMBAI
THE news of Asia’s oldest stock exchange acquiring a substantial stake in the Ahmedabad-based National Multi Commodity Exchange (NMCE) may have come as a surprise to many. To those in the know, it was a pure financial move by the Bombay Stock Exchange (BSE) in that it may prove to be a multi-bagger going forward when some financial bigwigs enter the commodity arena.
Recently, the BSE bought a 26% stake in NMCE for an undisclosed amount of money. People familiar with the deal say that the stock exchange had to shell out around Rs 40 crore for the stake, valuing the comex at around Rs 150 crore.
“BSE is of the firm belief that going ahead, others would be interested in acquiring a stake in NMCE. At that time, it would have an option of diluting a part of its stake and that too at a premium,” says a source.
It is clear that the stock exchange would not be involved in the daily working of the comex. BSE members would also not be automatically eligible for NMCE memberships. They would have to submit a request to the Forward Markets Commission (FMC).
BSE is said to have tried its luck with MCX but steep valuations were a hindrance. Also, the National Stock Exchange has a small stake in the exchange. It is also said that the timing of the deal has a lot to do with the forthcoming public issue of Multi Commodity Exchange (MCX) that is being valued at over $1 billion.
BSE knows that if it enters the arena at the right time at the right price, then going ahead it would be able to net a cool gain, said the official. Similarly, NCDEX was out of the question since NSE is one of the largest shareholders with a 15% stake in it. This brought NMCE, a strong player in agri commodities, into the picture. NMCE occupies the third slot among the leading commodity exchanges of the country. The daily average turnover of the Ahmedabad-based exchange is around Rs 500 crore.
“BSE’s larger counterpart (National Stock Exchange) already has a presence in the commodity market via NCDEX,” said an official. In his view, it was only a matter of time before BSE took a stake in one of the leading commodity exchanges. “BSE does not have a commodity licence and FMC would not give a new one. So, the only option was to acquire a stake in any of the three leading commodity exchanges,” added the official.
FMC norms stipulate that a single domestic investor cannot be given more than 26% stake in a commodity exchange. In the case of foreign investors, the limit has been capped at 5%. While the stake would make BSE eligible for a board representation, it is believed that the stock exchange would ask for two representations on the NMCE board.
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