The trading mechanism via shares as collateral is soon to be changed in August 2020. Exposure to wanting investors through demat holding will now have to pledge their holding to the broker to trade against the current mechanism where investors’ shares are physically transferred from the investor’s demat account to the broker’s collateral account.
This new mechanism was to be effective from June 01, 2020, is now extended to August 01, 2020, due to the Covid-19 pandemic.
Let’s get a brief idea about the basics of the existing mechanism and how the new mechanism will work.
What is the Present Mechanism?
In the present mechanism, an investor if wish to trade in the capital market, He/She can do it either by transferring funds or through demat holding transfer towards margin requirement for positions.
Our primary focus will be on transferring demat holding because it’s the subject matter. This whole process works because of a power of attorney (POA), which is given to a broker to save investors’ efforts, such as giving instruction slip to transfer demat holding each and every time which broker of the Demat account does on behalf of the investors to ease the operation.
In turn, the broker uses the investor’s collaterals to get limits/margins for itself to fulfil the investor’s margin obligation by pledging the same to the clearing corporations/members (CCs/CMs). This process has been in effect for around two decades.
How Does the Proposed Mechanism Work?
In the coming mechanism, investor holding will skip transfer to the broker’s collateral account. Instead, it will create a lien in the broker’s favour through which investors could create positions. This lien is denoted with Margin Pledge.
In turn, the broker will repledge the holding in favour of clearing corporations/members (CCs/CMs). This process is called margin re-pledge. The investor could see the status in their demat holding account as to how much is pledged and how much is re-pledged by the broker in turn.
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