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Change in Ways of Creating Collaterals on Share due to New Pledge/Re-Pledge Mechanism

The mechanism of trading via using shares as collateral is soon to be changed in the coming August 2020. Exposure to wanting investors through Demat holding will now have to pledge their holding to the broker as 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 existing mechanism and how the new mechanism will work.

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 main focus will be on the option of transfer of Demat holding because its the subject matter. This whole process works because of the power of attorney (POA) which is given to broker as 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 fulfill the investor’s margin obligation by pledging the same to the clearing corporations/members (CCs/CMs). This process is in effect around two decades.

Proposed Mechanism Work

In the coming mechanism, investor holding will skip getting transferred to the broker’s collateral account. Instead, it will create a lien in the broker’s favor through which investors could create positions. This lien is denoted with Margin Pledge.

In turn, the broker will repledge the holding in favor 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 re-pledged by the broker in turn.

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