Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.

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