Brokers gear up to rein in market risks

MUMBAI: Expecting increased volatility ahead of the Lok Sabha election results on Tuesday, brokers have alerted investors about increased risk-containment measures that could get triggered automatically in case of sharp price movements.
“Considering the perceived volatility that could arise due to elections, you are requested to note the (following things),” an advisory from HDFC Securities said.“Monitor your leveraged positions in equity, equity derivatives segment and MTF (margin trading facility). Ensure that surplus funds are maintained in linked accounts or funds transferred to your trading account or additional shares placed on margin pledge to cover any adverse movements in the market,” the email advisory said. It also said that intraday trading products would attract a minimum margin of 40% for June 4, when the results will be declared.

In the run-up to the election, volatility in the stock market increased manifold, with the past week recording a high of over two years. From a multi-year low of 10.2 on April 23, India VIX – the measure of market volatility – touched a high of 24.8 on May 31, NSE data showed. An advisory from Prabhudas Lilladher said that to ensure safety and mitigate potential risks during poll results week, it would implement additional risk control measures. “These measures will remain in place until post-election volatility subsides.”
Investors should note measures and adjustments that may impact trading activities, it said. Such measures include margin increase in the derivatives segment that will be 10% above the exchange’s margin. Margin for MTF products will be increased by 15% over and above the exchange’s compulsory margin. It would also reduce the amount of leverage that traders can enjoy each day. Additionally, the broking house could square off positions with loan-to-value ratios of above 80%. “To safeguard your investments, we encourage you to deposit additional margins, especially through fund transfers, to avoid any actions by our risk management teams in response to sharp market movements,” it said in an email to clients.