Panel moots market-friendly badla

However, R H Patil, managing director of NSE and a member of the Varma panel, has given a dissenting note, arguing in favour of twin-track trading system, registration of vyaj badla financiers and up-front payment of margins.

After submitting the report to the SEBI, Varma said the group has recommended abolition of the twin-track system of segregating carry-forward trades and delivery trades. “The twin-track system is not workable. No other stock exchange has opted for the system except for the BSE,” Varma said.

It has proposed a reduction in margin from 15 per cent to 10 per cent on gross positions with daily marking to market applying to both types of transactions. “Margins payments to the exchange should be valued dated the same day. Over a period of time exchanges must move towards realisation of margin payments before the next day’s trading begins,” the panel said.

According to Varma, as a precondition for adopting the modified carry forward system (MCFS), an exchange should have a well desinged software for margin computation and well established governance structures and administrative infrastructure for monitoring and enforcing the margining system.

The group has recommended elimination of four elements of the existing system such as limit of 90 days for carried forward of transactions, settlement only by delivery after 75 days, limit of Rs 10 crore on financier funding and overall limits, sub limits on purchase and sale and scripwise limits on carry forward transactions and on overall transactions.

In the case of vyaj badla in respect of dematerialised shares, a pledge of the shares should be marked in the electronic records of the depository. In the paper based system, the group has proposed that shares received by vyaj badla financiers should continue to be desposited with the clearing house as at present. In addition to other risk containment measures, the clearing house should at all points of time have an insurance policy covering the aggregate value of shares lying in the clearing house.

The group has endorsed some of the existing safeguards such as capital adequacy and other prudential safeguards and observed that these measures should be strictly enforced. “While choosing scrips for carry forward, the exchanges should ensure that the scrips have sufficient floating stock and high liquidity. Exchanges should have adequate monitoring and surveillance system to enable timely use of the various powers vested in them to regulate the market,” Varma said.

Welcoming the panel’s recommendations, BSE president M G Damani said the new measures were in line with market expectations and the BSE proposals. “As the panel has recommended a simplified system, more stock exchanges will come forward to implement forward trading,” he said.

According to SEBI senior executive director O P Gahrotra, the SEBI board is expected to consider the panel’s report at the next meeting in the second week of August.

Varma’s prescription

* Abolition of segregation of carry-forward and delivery trades.

* Removal of all limits on brokers and scrips

* A uniform margin of 10 % against 15 %

* Removal of the 90 days limit for carry forward.