Important: Trading Limits against Credit for Sale (CFS) and Sell restrictions effective 8 May 2023
Hello Traders / Investors,
Exchanges have recently made some changes in the Peak Margin Collection and its reporting by brokers. More details can be found in this circular (https://archives.nseindia.com/content/circulars/INSP56512.pdf). We have also posted on this topic earlier on this post - Evolving Margin Rules for Stock Brokers (Evolving margin rules and it’s impact on Brokers and Trading Clients effective 2 May 2023).
In compliance with these changes, we have updated the policy on Trading Limits and Order Management when you Sell Stock Holdings or Securities under the Cash Segment in the Delivery and MTF mode. This is an important change, and we request all investors and traders to make a note of this.
Earlier when you sold any stock from holdings (either Delivery or MTF), 80% of the sale value proceeds of the stocks you sold was available for trading instantly and balance 20% was withheld as margin for the said sell transaction which was made available to you the next day. This was under the presumption that the early pay-in of the securities sold was being allowed same-day but after the close of trading hours until the prescribed early pay-in cut off that is set by the clearing corporation.
Now with the changes in place regarding Margin Reporting and Settlement, only after the successful early pay-in of the securities, the 80% credit of the sale proceeds can be passed on as Trading Limit to the clients for buying any other stock or taking fresh positions in any other exchange segments.
We understand that Trading Limits and Margins are important for Traders, and to comply with the change, we have changed our processes to do the early pay-in of the securities sold on real time (in regular batches) and will continue to grant limits against the credit for sale post confirmation of early pay-in.
However, this will also come with certain changes/restrictions the way you buyback the securities sold as mentioned below, to avoid early pay-in default and you don’t land-up in risk.
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If you sell any stock from CNC holding (Delivery), buying the same stock again via MTF or CNC will not be permitted on the same day.
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If you sell any stock from MTF holding, buying the same stock again via MTF or CNC will not be permitted on the same day.
To ensure you continue to trade without any such limitations, we suggest that if you sell any CNC stock, where you want to trade in it again - you can buy the same stock again only after converting your position into intraday (MIS).
Note: MTF is Margin Trading Facility where in partial funding is done by the Stock Broker (in this case us) and CNC is cash and carry where the shares bought are paid in full but maybe pledged for getting trading limits.
Why did we do this?
Case 1:
Assume that you, the client, sold 100 shares of Reliance purchased via MTF. Against this order, we will do an early pay-in to give the 80% credit of sale.
Since shares purchased under MTF are always pledged, they will be first un-pledged and then early pay-in would be initiated. Now when the client again purchases 100 shares of Reliance there will be no net pay-in obligation. The previously generated early pay-in instruction will fail and will be reversed by clearing corporation and shares will become free in the clients demat account.
Now this will lead to the closure of the MTF position as there will be no corresponding securities pledged against shares purchased via MTF. The debit in MTF will be shifted to the client’s normal trading ledger and thus the client’s margin may get restricted and trading limits reduced due to the debit in normal trading ledger. This may also lead to margin penalty charges as well as interest on debits and margin shortages.
Case 2:
Assume the client sold 100 shares of Reliance via CNC. Against this order, we will do an early pay-in to give the 80% credit of sale.
Using the sale proceeds of 80% the client again purchases another stock or takes any position in Future and Options. Now when the client again purchases 100 shares of Reliance, there will be no pay-in obligation. The previously generated early pay-in instruction will fail and reversed by the clearing corporation and shares will become free in the clients demat account.
The new purchase of stock or new position in Futures and Options created against 80% sell benefit will be become uncovered and fall short of margins (due to failure of early pay-in and removal of pledge)
The debit against new purchase and/or non availability of margins for new Futures and Options positions will lead to debit in normal trading ledger and thus the client’s margin may get restricted and trading limits reduced due to the debit in normal trading ledger. This may also lead to margin penalty charges as well as interest on debits and margin shortages.
Concluding Notes:
These are evolving regulations and as they get implemented, we want to ensure that your trading and investing experience continues to be as seamless as possible, which we manage on the backend with our operations team. However, we also feel it is important for you to be aware of how your margins and limits on trading are updated in such scenarios.
At Dhan, we are always aligned towards bringing you the best possible experience while trading & investing. While we do that, we also have to ensure that we are compliant at all times. If there are further changes or enhancements to the margin rules and its implementation, we will keep our users posted.
Thank you
Rajesh Jain