The National Stock Exchange (NSE) has made the eligibility criteria stricter for acceptance of stocks as collateral. As a result, more than 1,000 securities will not be accepted as collateral from August 1.
Securities are used as collateral by clients to meet margin requirements for intraday or derivatives (Futures & Options) trading.
Stocks that will not be accepted as collateral from 1st August 2024 include Yes Bank, Adani Power, IRB Infrastructure, NBCC, Hudco, Bharat Dynamics, Bharti Hexacom, Go Digit, Tata Investment, One 97 Communications (Paytm), Barbeque Nation, and Inox Wind.
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From next month, NSE Clearing Limited (NCL) will implement stricter rules for accepting securities as collateral for margin trading. Eligible stocks must have been traded at least 99% of the days over the past six months and have an impact cost of up to 0.1% for an order value of Rs 1 lakh.
To help clearing members transition and replace the unapproved securities, NCL will continue to value these unapproved securities that were repledged with them as of July 31, 2024. However, a discount (haircut) will be applied to their value.
For example, when a security is valued at Rs 100 and a 20% haircut or deduction is applied, its collateral value becomes Rs 80. This cautious approach helps in managing risk and ensuring that there is enough coverage for the loan or margin provided against the collateral.
To support clearing members during the transition to replace unapproved securities, the NSE will gradually increase the haircut as follows:
| Month | Applicable Haircut |
| From 1 August, 2024 | 40% or VAR (value-at-risk), whichever is higher |
| From 1 September, 2024 | 60% or VAR, whichever is higher |
| From 1 October, 2024 | 80% or VAR, whichever is higher |
| From 1 November, 2024 | 100% |
What is Collateral?
In margin trading, you use collateral such as cash or shares to secure the funds needed for trading. Traders can pledge these securities with their brokers, who then repledge them with the clearing corporation to meet margin requirements for intraday or derivatives (Futures & Options) trading.
Significance of the Change
The NSE regularly reviews the securities that can be used for trading to improve risk management. By reducing the list of eligible securities, risk controls will be stricter because brokers will have fewer options to use as collateral. This change ensures that only highly liquid and low-cost securities are used for margin trading.
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As a result, brokers will have a smaller pool of stocks to offer as collateral. While brokers can still provide additional securities to customers for margins, they will need to deploy these from their own working capital, potentially affecting their liquidity management.
For mutual fund schemes on this list, the haircut will be adjusted to 5% for growth plans of overnight mutual funds, liquid funds, or government securities mutual funds.
For other mutual funds, the haircut will be based on the value-at-risk (VaR) margin using 6 standard deviations, with a minimum of 9%. This careful approach ensures that the calculated risk considers significant market changes.
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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing.
