NSE Drops Over 1000 Stocks from Collateral List: What It Means

The National Stock Exchange (NSE) recently issued a circular tightening the list of securities eligible as collateral for margin funding in intraday or derivatives trading. Out of the 1,730 eligible securities, NSE Clearing has removed 1,010, including prominent companies like Adani Power, YES Bank, Suzlon, Bharat Dynamics, and Paytm. Starting August 1, the exchange will only accept collateral from securities traded at least 99% of the days over the last six months and with an impact cost of up to 0.1% for an order value of Rs 1 lakh.

Understanding Margin Trading Facility (MTF)

Margin Trading Facility (MTF) allows investors to buy shares for a fraction of the total trade value, similar to ‘buy now, pay later.’ Investors put up a certain amount, and brokers lend the remaining funds, charging interest. For example, to buy 1,000 shares of a company trading at Rs 100 per share, an investor would need Rs 1 lakh. With MTF, the investor pays only 30%, and the broker funds the remaining 70% with interest.

What is Collateral?

In MTF, investors use collateral to secure borrowed funds from their broker. This collateral can be the stocks purchased or other securities in the investor’s account. It acts as a security deposit, protecting the broker against the funds lent. If the collateral’s value decreases, investors must add more collateral or sell positions to maintain the required margin.

New Rules for Collateral Eligibility

According to the revised NSE circular, only securities traded at least 99% of the days in the last six months and with an impact cost of up to 0.1% for an order value of Rs 1 lakh are eligible as collateral. Previously, around 1,730 stocks were eligible, but the new list eliminates 1,010 stocks starting August 1, 2024, in a phased manner. Notable companies removed include Adani Power, YES Bank, Suzlon, Bharat Dynamics, and Paytm.

Impact on MTF Book

Ashish Rathi, Whole-Time Director of HDFC Securities, stated in a conversation with CNBC-TV18 that the revised collateral list won’t impact the overall MTF book, which stands over Rs 73,500 crore. The changes affect the stocks investors pledge as collateral with their brokers in a phased manner. After investors pledge shares to brokers to maintain margin requirements, brokers repledge these shares to the Clearing Corporation. This repledging will change as the Clearing Corporation will no longer accept all securities, and haircuts will be applied.

Removing Unapproved Collateral

To support clearing members in replacing unapproved securities, NSE will progressively raise the haircut percentages from August 1 to November 1. The initial haircut on unapproved securities will be 40% or the value at risk (VAR), whichever is higher. This will increase to 60% from September 1, 80% from October 1, and 100% from November 1.

Why This Measure?

The changes aim to ensure that only highly liquid and stable stocks are used as collateral, reducing risk for the clearinghouse and the broader financial system. By tightening the collateral list, NSE aims to create a more stable and secure stock market environment in India.