NSE updates collateral criteria, makes F&O trading harder

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After the stormy surge in the stock market, the market regulator SEBI has taken several major steps to protect the interests of small investors and shield them from potential losses. This includes directives for reducing investments in mid-cap and small-cap funds. Meanwhile, SEBI Chairperson has not hesitated to warn small investors about bubble-like conditions in the market.

Now, the country’s largest stock exchange, NSE (National Stock Exchange), has also joined this effort. In fact, NSE has made the rules related to using stocks as collateral for margin requirements much stricter. What rules has the NSE changed? How will it affect the stocks? And how should traders strategize in light of this decision? Let’s understand.

Traders involved in intra-day or F&O (Futures and Options) trading in the stock market arrange margins by using stocks in their portfolio as collateral for buying and selling stocks. However, seeing the recent surge in the stock market and the high jumps in select stocks over a short period, NSE has become quite cautious.

What are NSE’s new rules for collateral stocks?

NSE has tightened the rules regarding the use of stocks as collateral for margin requirements for a total of 1,010 stocks. According to the new rules, NSE Clearing Limited (NCL) will no longer approve the use of stocks for collateral if they have high impact costs or low trading activity.

NCL will only approve stocks for collateral that meet two criteria. One, the impact cost for an order value of ₹100,000 should be up to 0.1%. Two, the stock should have been traded on at least 99% of the trading days in the past six months.

Impact cost refers to the cost incurred to complete a pre-determined order value. Under the new rules, 1,010 out of a total of 1,730 stocks in the collateral list will be removed. These changes are effective gradually starting from August 1. NSE will update the list of stocks periodically.

Stock exchanges provide margin facilities to enhance traders’ ability to buy shares. This allows traders to take positions by paying a small portion of the total order value. Margins payments are acceptable in cash or by pledging shares. Traders pledge their shares with brokers, who in turn pledge them with the clearing corporation. However, with NSE’s new decision, the options for collateral shares for F&O and intra-day trading will be reduced.

Among the shares removed from this list by NSE, 25 have a market cap of over ₹20,000 crore. Some prominent companies in this list include Adani Power, Yes Bank, Suzlon, Hudco, Bharat Dynamics, Bharti Hexacom, IRB Infrastructure, NBCC, Go Digit, Tata Investment, Paytm, HCC, Barbeque Nation, and Inox Wind. Other stocks now excluded from margin collateral list include Jupiter Wagons, KIOCL, Jyoti CNC Automation, JBM Auto, Hatsun Agro, Tejas Networks, and Swan Energy.

To understand the impact of NSE’s decision, experts say that the margin trading facility is currently valued at ₹73,500 crore. By reducing the list of collateral stocks, NSE aims to strengthen its risk management. If you are trading in stocks that are under NSE’s radar, you might want to keep the volume of trades in these stocks limited.