Investment in Government Securities

Just curious. If pledged Gsec bonds can not be sold by broker on default because they are not liquid.

And the maturity date of bond reaches. Who will the RBI send maturity value (money) to?

Bond holder or broker?

Very few gsecs are liquid.

Gsec’s pledge benefit cannot be based on how much its traded per day, in that case the investible universe will reduce to less than 10 ISINs.

Also broker doesnt square off collateral directly, the option is given to the customer to add the funds during margin call. @PravinJ correct me if I am wrong.

@viswaram @amish The G-Secs which could be allowed or not to be accepted as pledge depends on a Broker’s Risk policy and hence vary broadly. Usually the list of securities (mainly G-Secs) are reviewed periodically and then decision is taken to accept them or not as a pledge instrument. As you might be aware that securities are only pledged in the favour of Broker’s separate account (known as Margin Pledge Account) but remain in your demat (only a flag for Margin Pledge is enabled). Now when the maturity arrives, since the securities are in your account, the redemption money is sent to your account and the securities get extinguished. Hence, we (as a broker) land up in risk. For the detailed list of securities available at Dhan for pledge can be found here.

Yes square off is not done immediately. We do send margin calls and inform you will in advance. If the margin call is fulfilled in the stipulated time, we do not square off any of your holdings.

Yes - thats exactly my point. The onus should be on the customer to find the funds by selling his security or arranging it from somewhere.

I would not have argued to get X or Y stock or mutual fund added in the pledge list, what we are talking about are the GOI bonds - the highest rated credit instrument in India. Ideally all the issues should be in your pledge list.

Absolutely agree with you. I see there is a 2023 GOI bond in my list - you can choose to ignore that due to the above reason.

@viswaram I completely get your point and its valid too in an ideal situation. However, digging into this deeper and showcasing the operational challenges.

Assume a broker allows 100% of the G-Secs to be accepted as pledge. A client have given some G-Secs as a pledge and gets into shortfall. So firstly what we do is a margin call and wait for the cut-off period to elapse. Once the cut-off time is gone, we do a final recon of payments done by a client and then we start squaring off the positions to recover the margin. Now this process is manual. We check the impact cost of a security and chose the lowest one to square off over the one which has a higher impact cost (so that client does not bear the heat of spread). Now the client has a G-Sec is which is moderately traded, it will be sold at a much lesser price (due to buyer bidding at the lowest). The client would face an un-necessary loss. As I said the checks are mainly manual (and part auto) this leads to operational challenge.

Also, value of pledge securities is computed by last available LTP and that is used quite often. For illiquid securities, the value would be incorrect and hence our value of pledge securities report wont be correlating with the actual value.

Just to highlight (being into the broking business since 2014) - Most of the brokers misused this. They would place a bid over the best bid just before squaring off the security and thus would siphon off the client’s security into their own (and related) accounts.

1 Like