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Technical issue hits NSE cash, F&O markets, experts discuss

An Option is a contract between two parties where buying and selling a given amount of underlying assets at a pre-specified price on or before a given date takes place. The commodities future option contract is similar to a stock, interest rate or currency futures contract.

The National Stock Exchange (NSE) closes cash and future markets at 11:40 am. The rates were not updating since 10:08 am. In an interview with CNBC-TV18, Dipan Mehta of Elixir Equities, Rajesh Baheti, MD of Crosseas Capital Services, Nithin Kamath of Zerodha, Deepak Shenoy, Founder of Capital Mind, JN Gupta, MD of Stakeholders Empowerment Services and Former ED of SEBI, Mohandas Pai, Former Board Member of NSE and Dinesh Thakkar, CMD of Angel Broking shared their views on the technical glitch and the market.

“It’s one of the technical glitches which exchanges do face from time to time. It’s not just NSE, we have seen Tokyo Stock Exchange, Nasdaq and other exchanges also occasionally, have some technical issues because of which they need to shut down temporarily and which is what has happened today,” said Mehta.

Meanwhile, Kamath said, “I am guessing they (NSE) are redoing their beginning of the day process because every time you close an exchange and restart, you will have a bunch of process to follow which potentially can take some time and that’s what is happening right now.”

“In all likelihood all the open orders that were placed until now will be cancelled and when the market will reopen people will have to place orders again,” said Kamath.

Speaking about the technical glitch, Baheti said, “If you have technology it’s bound to create some glitches. There are multiple issues and technology is something that can breakdown. My only request is, we at broker’s end also face technology issues but the exchange does not spare us when something like this happens with us. So maybe it’s time for the exchanges also to understand that at the broker’s end also, from time to time, we face technology issues and that kind of leverage should be given to us also.”

On trading resumption, Gupta said, “The trading will resume, but when we do not know but if the trading resumes quite late and there is a very little time then logically the trading time should be extended but then it will be a difficult thing because Bombay Stock Exchange (BSE) will have to extend.”

Talking about backup support, Pai said, “I agree that it’s a cause of worry. The hot standby should come up in 45 minutes and if that doesn’t come by the second standby should come up because there is a standby to a standby; the entire architecture is extremely robust, the best minds in the world and the best minds in India have worked on that. So let us wait to see what happens. Yes, I understand the anxiety of all the traders; they are anxious about money, settlement etc. I am sure SEBI will come with a protocol and will make sure that there is a soft-landing. We must understand that NSE and BSE are the best in class institutions globally. We must give them the benefit of doubt and not condemn them.”

For entire discussion, watch the video.

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Will Sebi relaxing surveillance measures stop brokers from misusing client money?

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Market regulator Sebi on Wednesday relaxed certain surveillance measures, including those pertaining to market-wide position limits, that were put in place eight months ago to curb volatility in the markets due to the coronavirus pandemic.

Citing the “changed market environment”, the watchdog has decided to relax the measures with respect to the increased margin for non-F&O (Futures & Options) stocks and revised market-wide position limits.

Reacting to it, Rajesh Baheti, MD of Crosseas Capital Services said, “If SEBI’s idea was to stop the broker from misusing client money, how is this going to help that. Also, you are putting more money in the hands of the broker.”

Baheti said that there are rules that can be interpreted in multiple ways. “The margins that the exchange used to send us was the end-of-day margin file and that is how they were measuring what was collected against what was required to be collected. The concept of peak margin did not exist and since that number was not known to anybody, there was no way anybody could have budgeted for that,” he said.

Watch the video for more

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Karvy issue puts a question mark on the concept of loan against shares, says Crosseas Capital’s Rajesh Baheti

A woman points to an electronic board showing stock prices as she poses in front of the board at the Tokyo Stock Exchange (TSE), in Tokyo, Japan, January 4, 2019. REUTERS/Kim Kyung-Hoon/File Photo

The Karvy issue deepens after one of the lenders, Bajaj Finance, is understood to have moved the Securities Appellate Tribunal (SAT) against NSDL’s decision to transfer securities back to clients.

Rajesh Baheti, MD of Crosseas Capital Services, spoke at length about the issue to CNBC-TV18. “Twenty years ago, we did away with physical settlement in terms of physical shares and moved to demat and we thought the concept of bad delivery had ended,” said Baheti.

“The move to transfer those securities shows we have moved back into a regime where even demat shares can be bad delivery and this opens up a big question into everything else; it is not just borrowing against stock. It could be some client coming in and selling his stock and now it begs a question as to every time a client comes to sell a share, are we supposed to look at whether he is the owner of the share or not that he sells. I believe SAT has stayed transfer of more securities. Now the question is again – was the client’s contract with Karvy or was the client’s contract with the bank?” he pointed out.

“As is the general understanding, Karvy’s contract was with the client and if anybody owes money to the clients or shares to the clients, it should be Karvy. Now Sebi has ordered the banks to return the shares or rather suo moto ordered NSDL to transfer those shares from the banks’ pledged account into the clients’ account and that leaves banks with nothing on hand. Therefore, it’s tricky in terms of what happens legally,” Baheti added.

Speaking about protecting lenders’ interest, Baheti said, “It is clear that Karvy is definitely at fault. Karvy committed a crime. I think Karvy should be punished for it. I don’t think the banks committed a crime. So in this case, the banks are getting the punishment for a crime committed by the broker.”

“I think very soon the RBI will step into this because the regulator for the lenders is the RBI and they are going to go back to the RBI and say, you started this product called loan against shares and we lent in good faith and if that good faith cannot be honoured, then why should we even offer a product like that. So it has wider ramifications in terms of how the RBI interprets this whole thing and whether we get into a tussle between two regulators and the entire concept of loan against shares which is such a big portfolio,” added Baheti.

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Margin rules in derivatives should help cover risk, not control market exposure, says Crossseas Capital

Rajesh Baheti, MD at Crosseas Capital Services, spoke to CNBC-TV18 about the increase in margin requirements for brokers in the derivatives markets.

“Over the last few years they have been constantly engaging with Sebi that the margining system that we have adopted may have been suitable to us 10-15 years ago when we did not have market history and that time there could have been over-cautious approach when futures and options got launched but now that we have a history behind us, margining essentially should be a tool to cover risk in any persons portfolio or exposure to the markets and should not be used as a tool to control the amount of exposure that the market takes,” Baheti said on Friday.

“Sebi levies three kinds of margins in India, while no other exchange in the world three components of margin separately of each other,” he said.

When asked if margin requirements in India are higher because regulators don’t want too much of leverage, he said, “I would completely agree that if I am taking a position that entails a certain kind of risk, you must take that margin from me.”

“We are completely with Sebi when it says there should be adequate risk cover but it should be linked to risk and not exposure because when you do Options in the market it is not the linear payoff that I create, I can create multiple strategies using Options where I can have limited loss strategies” he said.

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Decoding the NSEL case: Here’s what expert says

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The Securities and Exchange Board of India (Sebi) orders this week barred five broking firms from dealing in commodities declaring them as not fit and proper. Among these are Motilal Oswal Commodities, India Infoline Commodities, Anand Rathi Commodities, Geofin Comtrade and Philip Commodities India. The regulator has an ongoing investigation against another 295 forms on similar charges in the NSEL case.

More than 90 percent of contracts on the NSEL were paired contracts and all 300 brokers traded on that exchange issued paired contracts to their clients. In the normal course, this order should have created chaos and rattle the commodity derivatives market, its volumes are participation but that clearly hasn’t been the case.

Sebi, which took over the regulation of the commodity market from the forward market commission after the scam in NSEL came to light allowed the broking activities and equities and commodity derivatives to be integrated into one entity in 2017 by amending the securities contracts regulation rules.

Rajesh Baheti, president of Association of National Exchanges Members of India (ANMI) shared his views and outlook.

“At ANMI, we believe that these orders are not proper because the brokers did not have the kind of role to play in that entire scam as has made out to be. What happened is that you must understand that the exchange per se was legal or it was not governed by FMC on Sebi at that time but the exchange was definitely legal, it was set up under the consumer affairs ministry Sharad Pawar was looking after it and the entire exchange was legally set up, it had great parentage coming out of the FTIL who promoted MCX and MCX-SX. Some of the contracts that this exchange launched turned out to be illegal,” he said.