Brokers readily admit that the stock market crash last month has been the bloodiest in living memory. Now, the latest data from the National Stock Exchange testifies to that admission.
Figures on the NSE website reveal that terminals of 372 members of the 821 active members in the futures and options segment were deactivated for at least a day at some point during January. Terminals are usually deactivated by the exchange when the trading members are unable to meet their margin requirements.
The severity of the fall can be gauged from the fact that even some of the respectable names in the broking industry had trouble forking out margins in time. The list includes prominent names like Khandwala Securities, Karvy Stock Broking and BRICS Securities. These brokers faced problems in terms of their margin requirements, which was essentially the reason that the stock exchange had to take some hard measures.
The last time when NSE resorted to such large-scale deactivation of trading terminals was in May 2006. Then, around 190 brokers were affected by the move.
Collection of daily margins is an essential part of the risk management system of the exchanges, considering that futures allow an investor to take an exposure to an underlying share many times the amount deposited, called margin.
There are various kinds of margins collected by the stock exchange, the most common one being the mark-to-market (MTM) margin.
In the case of MTM, the brokers have to keep topping up their margins deposited with the exchange, depending on any negative movement in securities. The clients, who have taken positions, have to keep depositing their margins with the broker who, in turn, pay the same to the exchange. For some reason, if the broker is unable to collect the margins from his clients on time, he has to either pay it to the exchanges from own pocket. A failure means deactivation of his terminal.
“A large number of terminals deactivated should be only seen as a comment on the extent of the crash in the prices of shares,” said Sailav Kaji of Pioneer Investcorp, a Mumbai-based brokerage. Mr Kaji is one of the many experts who blame the entire fiasco to the large open interest positions. On January 18, 2008, just a day before the market crashed by 7%, the total open interest position was 2.68 crore shares. This is at least twice when compared to the open interest volume on the day before the May 18, 2006 crash.
In many cases, the brokerages had given a free run to their clients allowing them to take up positions more than what their margin money allowed them to. Many clients were unable to pay up in time, some clients did not have enough funds on them, while some others refused to pay their dues over disputes relating to squaring up of positions.
“NSE had introduced so many mid-cap stocks in the derivatives segment,” said a broker who runs a large institutional brokerage that focuses on derivatives. “Considering that most of these shares went down by half, the sudden rise in margin call should not come as a surprise,” he added.
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