Deliciously timed move to margin institutions

It was perhaps pure coincidence but the timing was still delicious – just two days after the collapse and bail-out of the US investment bank, Bear Stearns, the Securities and Exchange Board of India announced that even institutional investors in the Indian stock market would have to pay margins to back their trades. SEBI was careful to say that the move was designed to create a level playing field since non institutional investors already pay margins. But the fact remains that the move will also make the market safer. Exchanges are designed to eliminate counter party risk by interposing a central counter party which relies on collateral instead of making assumptions about the solvency of its counter parties. Traditionally, it has been assumed that margins are needed only in derivative markets and not in cash markets that settle in a couple of days. The speed with which Bear Stearns collapsed suggests that this assumption is dubious. SEBI is right to margin all investors in the cash market as well.

Posted at 10:52 am IST on Sun, 23 Mar 2008         permanent link

Categories: equity markets, exchanges, risk management

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