Brokers in India Wary After Last Week's Crash

The 1100-point crash in the Sensex last week was largely due to the highly leveraged positions in the derivatives market.  Sensex represents the benchmark index of the Bombay Stock Exchange (BSE).  It is composed of 30 of the largest and most actively-traded stocks on the BSE.  Initially compiled in 1986, the Sensex is the oldest stock index in India.

Even after the National Stock Exchange of India (NSE) and BSE cut the margin requirements to improve the liquidity, brokers are not willing to relax margins for clients.  Exchanges had cut the broker exposure margins by 50 per cent for both cash and derivative markets.  While margins for stocks in the cash and derivatives segments were cut to 5 per cent from 10 per cent, margin for index products in the derivatives segment was cut to three per cent from six per cent.

The reduction would have enabled investors to take bigger exposure with a smaller deposit but many brokers are not willing to lower margins for investors at a time when the markets have become extremely volatile.  However, brokers do not want to offer this leeway to clients.  Even in some cases, brokers have substantially increased their margins in order to discourage client from taking fresh position.   "We are not going to relax the margins requirements for the clients.  This is part of our risk management measure," said C J George, MD, Geojit Financial Services.

When the markets went into a tailspin, brokers had to cut client positions, as there were no adequate margins and terminals were shut down by the exchanges.  Clients are disputing the brokers' decision to square off their positions.  According to sources, it will take a while for brokers to recover these losses from the clients.

Many traders have suffered losses and these players are shying away from coming back to the market.  This is evident from the drop in volumes and turnover in the market over past few days, as brokerage house are trying to be conservative.  "In these volatile trading sessions, we are putting additional margins when required.  This way we helped our client to make profit in good time and protect them from high risk when the markets fell," said Sunil Shah, MD, HDFC.