The Securities and Exchange Board of India (Sebi) on Wednesday increased the base minimum capital (BMC) deposit for stock brokers, especially the ones dealing with algorithmic trading (algo), in order to mitigate risks in the market.
In a circular, the regulator said BMC, the deposit maintained by a broker against which no exposure for trades is allowed, will increase to as much as Rs 50 lakh from Rs 10 lakh earlier.
Sebi has proposed a higher BMC requirement for those using high-frequency algo trading, while the deposits would be comparatively lower for trading members indulging in only proprietary trading without algo.
The deposit will be used for meeting contingencies in any segment of the exchange.
All trading members and brokers who do algo will have to pay a BMC of Rs 50 lakh with the stock exchanges. Brokers or trading members who do proprietary trading and trading on behalf of their clients without algo will have to pay Rs 25 lakh.
Meanwhile, brokers who do just proprietary trading and trading only on behalf of client without algo will have to pay Rs 10 lakh and Rs 15 lakh respectively.
"The BMC deposit requirement was prescribed to be commensurate with the risks, other than market risk, that the broker may bring to the system. The various technological changes and the increased speeds of trading have brought to fore the greater quantum of risks arising during the course of execution of transactions. In light of this, based on deliberations at various forums, it has been decided to realign the BMC requirements with the risk profiles," Sebi said in a circular.
The regulator said a minimum 50 per cent of the deposit should be in the form of cash and cash equivalents.
For stock brokers or trading members who do not have nation-wide trading terminals, the deposit requirement will be 40 per cent lower.
The changes announced on Wednesday by Sebi will come into effect from March 31, 2013.
"The stock exchanges shall be permitted to prescribe suitable deposit requirements, over and above the Sebi prescribed norms, based on their perception and evaluation of risks involved," said the circular.
According to the revised BMC framework, it would be enhanced for members holding registration as 'stock-broker' in cash segment, while BMC would also be introduced for members holding registration as 'trading member' in any derivative segment.
Way back in 1996, Sebi had asked the stock exchanges to double the base minimum capital requirement for their members from Rs 5 lakh to Rs 10 lakh in the case of the BSE and Calcutta Stock Exchange, from Rs 3.5 lakh to Rs 7 lakh in the case of the Delhi and Ahmedabad Stock Exchange and from Rs 2 lakh to Rs 4 lakh in the case of other stock exchanges.
Later in 2005, Sebi had made certain changes in the BMC framework, but the deposit amounts remained same at that time.
The regulator said stock brokers or trading members should maintain a minimum capital of Rs 10 lakh in case of trading of securities are done through their own money rather than customers' without using algo trade.
Algo refers to orders on bourses that are generated using high-frequency and automated execution logic.