Mumbai: The Securities and Exchange Board of India (SEBI) has decided to keep in abeyance the requirement of upfront margining for institutional trades, which was supposed to commence on June 16 this year.

The upfront margining plan, which was expected to create a level playing field among various classes of investors, was halted halfway, as the stock markets regulator said there are practical difficulties in implementing it.

Under the upfront margining plan, margins will be payable by the institutional investor prior to execution of the trade. This margin will be collected by the clearing corporation exchange through the broker who executes the trade for the institutional investor.

On confirmation of the trade, the margin liability will move to the custodian of the institutional investor.

As most FIIs operate on the payment on delivery mode, the custodians and brokers would have to bear the margin between themselves till such time the FII makes payment on T+2. 

''In the light of difficulties expressed by market participants regarding implementation of upfront margining of institutional trades in the cash market, it has been decided to keep the same in abeyance. Accordingly, institutional trades in the cash market would continue to be margined on T+1 basis till further directions,'' the SEBI said in a circular.

Transactions by institutional investors in the cash market were exempt from margins until 19 March when SEBI came up with an order making it mandatory - a move ''to provide a level playing field to all investors.''

According to the SEBI circular, the margin rules were to be implemented in two tranches – in the first phase beginning 21 April, all institutional trades executed on the cash margin will attract margins on a T+1 basis, ie, the margins have to be paid the day after the transaction.

In the second phase, proposed to start on 16 June, the margin system would move to an upfront basis. This would have required payment of margins prior to execution of trade. SEBI has now kept this under abeyance until further orders.

Margins are the brokers' safety net against the risk of default by the client. The margins in the cash market will comprise Value at Risk (VaR) margins, Extreme Loss Margin (ELM) and Mark to Market (MTM) margins. On an average, the margin for a typical equity trade varies from 15 per cent to 25 per cent.

However, since institutions deal through custodians, and custodians are often arms of banks which hold cash for the institutions, the question of default risk almost does not arise.