Banks to stop intraday funding without collateral to brokers

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The regulator is asking banks to end the decades-long practice of funding stockbrokers during the day without collateral.

Intraday funding, better known as “daylight exposure” in banking parlance, is a crucial facility that allows brokers to fill a gap of a few hours while waiting to receive money from buyers of equities, or to provide derivatives trading margin in the morning or to pay for spot trades by institutions in the event of a mismatch.

The Reserve Bank of India (RBI) recently advised four major private sector banks that these intraday credits must be collateralized by a minimum margin of 50% in the form of fixed deposits and marketable securities, two senior bankers told ET. . Thus, a broker drawing ₹500 crore as intra-day funds must post collateral of at least ₹250 crore to the lending bank.

“Brokers will have to arrange collateral, some of the smaller ones will have a hard time. Their cost is expected to increase. They will have to raise funds, create fixed deposits that can be pledged as collateral and in doing so can make negative carry. We we ask if there is a strong rationale for this when there is a strong margin system and other checks and balances put in place by exchanges and clearinghouses,” one of the people said.

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Until now, these intraday exposures to market intermediaries – unlike guarantees to a broker or longer-term loans to fund proprietary transactions – were not considered “loans” to brokers. It remained largely a gray area as neither the banks classified it as a capital market exposure nor the regulator insisted on it. However, this changed with RBI imposing conditions on banks to have business and corporate current accounts.

According to the regulation, a bank with less than 10% of the total approved facilities – comprising loans, non-financial activities such as guarantees and overdrafts – to a company cannot have its current accounts which are sought by lenders. as interest-free deposits. reduce a bank’s cost of funds. Multinational banks, which were harmed by the rule, lobbied RBI for the inclusion of intraday credit in the calculation of “total approved facilities”. “And, now, the inclusion of day limits (as a loan) in the current account circular changes the rule on intra-day lines to brokers in a way that most banks did not expect. RBI, during routine audits of banks, separately tells them that there can be no intraday funding without collateral for brokers,” an industry official said.

The banks that received the communication from the central bank also offer custodial services to institutional clients such as foreign portfolio investors, mutual funds and insurance companies.

Banks also take daylight exposure to money market funds to enable them to arrange funds to meet redemption orders from investors. “I don’t think RBI is concerned about these intra-day lines to asset management firms which are intermediary vehicles. But RBI is risk averse when it comes to banks’ exposure to brokers and builders. What if the customer does not pay? There have been broker failures in recent years,” said a person familiar with the regulatory position. RBI’s spokesperson could not be reached for comment.

Significantly, the RBI directive comes about a month before some of the stocks that REITs invest in can be included in the T+1 (or trade plus one day) settlement cycles that were introduced at the end of February this year. “There is a real possibility that hand delivery transactions (made by REITs) will increase with T+1 and this would lead to more borrowing from banks to fill the payment gap,” said an official with a market intermediary. Hand delivery transactions result from discrepancies between the contractual notes generated by brokers and the confirmation given by global and local custodians of offshore funds. When a custodian does not confirm, the broker must settle the transaction with the clearing house. In such cases where the broker has to put money in at the time of settlement, he has to borrow from the banks, receives the money from the custodian once the custodian receives the shares, and then repays the bank at the end of the day .

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