Banks will close brokers’ collateral-free intra-day funds

Banks have been told by regulators to end the decades-long practice of financing stock brokers without collateral.

Intra-day funding, also known as ‘daylight exposure’ in banking terms, is an important advantage that enables brokers to defer receipts from stock buyers within a few hours, or to arrange or pay for derivatives trade margins in the morning. Spot trade by institution in case of discrepancy.

The Reserve Bank of India (RBI) has recently approached four major private sector banks that such intra-day credits should be backed up by a minimum margin of 50% in the form of fixed deposits and marketable securities, two senior bankers told ET. Thus, if a broker draws ₹ 500 crore as intra-day fund, he must deposit at least ₹ 250 crore with the lending bank.

“Brokers have to arrange collateral, it will be very difficult for some minors. It is expected that their costs will increase. They will have to raise funds, create permanent deposits that can be given as collateral and the process can continue. Negative carry. We think. Whether or not there is a strong rationale for that when a strong margin system and other checks and balances are established by the stock exchange and clearing house, “said one person.

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Until now, such intra-day exposure to market intermediaries – as opposed to a broker’s guarantee or a long-term loan to finance a proprietary business – was not considered a ‘loan’ to brokers. It remained essentially a gray area because banks did not classify it as capital market exposure or regulators did not emphasize it. However, this has changed with the imposition of conditions on banks for RBI firms and companies to have current accounts.

According to the regulations, less than 10% of the total authorized benefits of a bank – loans, non-fund business such as guarantees, and overdrafts – a company cannot have its current account which lenders are asking for as zero-interest deposits. Reduce the cost of funds in a bank. MNC banks, which were affected by the rule, lobbied the RBI for the inclusion of intra-day credit to calculate ‘total permitted benefits’. “And, now with the inclusion of daylight limit (as loan) in current account circulars, the rules are being changed for brokers in a way that most banks did not expect. No, “said an industry official.

Banks that have been approached by the central bank provide custodial services to institutional clients such as foreign portfolio investors, mutual funds and insurance companies.

Banks take daylight exposure to MFs to enable them to raise funds to meet redemption orders from investors. “I don’t think the RBI is concerned with this kind of intra-day line with asset management companies that are pass-through vehicles. But the RBI’s risk of bank exposure to brokers and builders can be avoided. Defaulter, “said one person who is aware of the regulatory position. An RBI spokesman could not be reached for comment.

Significantly, the RBI’s directive comes almost a month before stocks in which FPIs invest could be included in the T + 1 (or Trade Plus One Day) settlement cycle, which began in late February this year. “There is a distinct possibility that the hand delivery trade (made by FPIs) may increase with T + 1 and this will lead to more borrowing from banks to fill the payment gap,” said a market mediator. Hand delivery trades stem from discrepancies between contract notes made by brokers and confirmations issued by global and local custodians of offshore funds. When a custodian does not confirm, the broker has to settle the trade with the clearing corporation. In such cases where the broker has to deposit money at the time of settlement, he has to borrow from the bank, take the money from the custodian after receiving the shares and then pay at the bank at the end of the day.

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