Bracing for volatility: Brokers up margin requirement ahead of election results

Recognizing the critical impact election results could have on market stability, brokerage firms like HDFC Securities, Prabhudas Lilladher, and Nirmal Bang are actively working to safeguard their clients and minimize capital loss risks, according to people familiar with the developments who requested anonymity.

Meanwhile, others like FYERS and Zerodha are still finalizing their strategies, with decisions expected soon, the same people noted.

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Election outcome and heightened caution

HDFC Securities has proactively informed its clientele that "considering the perceived volatility that could arise due to elections," the brokerage's intraday product will require a minimum margin of 40% starting on 4 June.

Currently, the margin requirement for intraday trades in HDFC Securities is likely between 20% and 30%, depending on stock volatility. In exceptional scenarios, it could be more.

For instance, if an investor has ₹100, they must pay an upfront margin fee of 20%, which amounts to ₹20. With the increase in the margin requirement, the investor now needs to pay ₹40.

Ashish Rathi, whole-time director, HDFC Securities, justified this decision as a precaution against erratic market behaviour which could cause sharp volatility in intraday trades. “In the event of unexpected market disruptions or circuit breakers, a market freeze can trap customers, making it extremely difficult for them to exit their positions," Rathi explained.

This cautious approach is mirrored across the industry, with several domestic brokerage houses also revising their margin requirements.

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In fact, margin usage restrictions have been significantly tightened. Previously, assuming a 25% margin requirement, customers could leverage up to four times their credit balance; now, they are restricted to using only their actual credit balance until the election results are announced, according to a dealer who requested anonymity.

For example, a customer with a credit balance of ₹100, who previously could trade up to ₹400, is now limited to trading only ₹100. This change significantly reduces their trading capacity, reflecting the brokerage firms' cautious stance in light of the upcoming election outcomes.

Nirav Karkera, head of research at wealth-tech startup Fisdom, said, "We expect the volatility to increase significantly above the near-term average on the day. It would not be surprising to observe several brokers increase intraday margin requirements to a significant extent."

Strategies amid uncertainty

While most brokerages are tightening their grips, others like discount brokerage firm FYERS are still deliberating their next move. 

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Tejas Khoday, co-founder and chief executive, FYERS, highlighted a generally cautious stance, albeit not as stringent as others. 

"In times such as elections, to temper the exuberance of investors, we typically increase margin requirements by a little bit, though not to the extent seen in other brokerages," Khoday remarked. 

He also shed light on additional precautionary measures, such as disabling certain conditional order types and intraday orders for select stocks within the highly volatile small-cap sector.

The underlying tension is palpable in the broader market as well. The India VIX index, often referred to as the fear gauge, has surged 88% in the past month alone, signifying rising investor apprehension as the results date nears.

The financial markets are not just responding to immediate election-related disruptions but are also positioning in anticipation of potential policy continuities or shifts. 

A recent report from CLSA highlighted that stocks likely to benefit from Prime Minister Narendra Modi’s policies have shown remarkable performance, especially public-sector stocks, hinting at market expectations of a favourable election outcome for the ruling party.

With the final phase of polling and exit polls both scheduled for 1 June, and the results due on 4 June, the financial markets are on tenterhooks, reminiscent of the historical trading halts following the 2004 crashes and the surges of 2009.

A 30 May report from Motilal Oswal Financial Services encapsulates the sentiment, predicting a "knee jerk reaction" to the exit polls and final results.

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