What is Margin pledge system?

1. Margin pledge system What is Margin pledge system? If you’ve been closely chasing the activities of the market regulator on a regular basis, you might have come across a flood of guidelines brought up in recent times, all thoroughly projected at safeguarding the interest of investors. From reportage of client level cash & bank account balance to regulating leverage across the sector, all actions conclude in attaining the major objectives. The new margin pledging system too is supposed to further defend investors. A brokerage is known to be the guardian of client funds & securities. When one transfers funds or stocks to his broker, he entrusts him/her with the accountability of managing various securities without any preconception. Considering this, there still are rumors of brokers exploiting client funds and/or securities commended to them. Taking all these actions into notice, SEBI has taken more steps to reinforce the regulatory framework which has led to the origin of the new pledge-unpledged system for stocks. When a person wants to trade with a broker, he needs to keep margins for trading. These margins can be stored in the form of cash or stocks. Transferring cash is quite upright. As far as stocks are concerned, at present, when a client wants to pledge his stocks to gain margins, he is supposed to transfer securities from his account to the broker’s account. The broker then initiates these securities to the Clearing Corporation. This transfer of title (ownership) of the securities leads to an open window in the system, enabling certain brokers to mistreat these securities. This issue was managed by bringing in the new margin pledge system that has become effective from August 01, 2020. In the fresh margin pledge system, the stocks don’t leave the investor’s Demat account, instead a pledge is obvious in favor of the broker. Even if you are working with the best stock broker in India, he is supposed to open a separate Demat account with the name ‘TMCM – Client Securities Margin Pledge Account’ for this purpose (TMCM stands for Trading Member Clearing Member). The broker then re- pledges these securities in favour of the Clearing Corporation and obtains margins. Some of the major benefits of this new pledge system are:

2. Margin pledge system · No misuse of securities: As stocks don’t leave the investor’s account, there’s less likelihood of waste of securities. In addition, it wouldn’t be possible to pledge one client’s stocks to provide margin to another client. · Corporate movements: In the present pledge system, as the stocks are put in the broker’s collateral account, the broker is the receiver of all cash and non-cash corporate actions such as dividends, bonus, rights, etc. While the broker is meant to willingly transfer these benefits to the investor, a non-savvy investor may miss out on claiming such credits in case that the broker doesn’t. · Pledge given for all approved securities: The top 10 stock brokers in India don’t receive pledge of all instruments permitted by the Exchanges. For instance, specific liquid funds give dividends in the form of large number of units of the same fund. The operative nightmare around integration the dividends received and transferring them to the investors has held them back from considering these instruments as margins. In future, since the stocks are all held in the client’s own account, any appropriate security will be liable for pledge. · Option to sell pledged stocks: This is a feature brokers have been working to make it accessible, allowing investors to sell pledged stocks without making a request to unpledged and wait until they are deposited in their Demat account. With the new pledge system it becomes much simpler to use this. This covers the risk from market movements in the stocks you’ve pledged.