Fixed deposits may not longer be taken as collateral for trading on the stock market

Your bank fixed deposit may no longer be accepted as collateral for trading in the stock market with clearing corporations, the entities that handle settlement and delivery of trade on the bourses, are looking to remove this instrument for being used as security for market transactions.

What this in effect means is that brokers would no longer be able to use fixed deposits of their clients as margin money to conclude trade on their behalf. This would be so as such instruments would not be accepted by clearing corporations to complete a transaction.

Sources aware of the development said that the move follows difficulties in legal enforceability and liquidating bank FDs in the event of a default by an investor. This creates a problem in the entire chain of stock transactions and settlements, and affects trade.

"In times where intrinsic values of companies are challenged, Bank Fixed Deposits -- once considered as the most reliable investment" -- have been brought under the SEBI's radar in light of subterfuge carried out by market participants, brokers and intermediaries. It is common practice that Clearing Corporations of stock exchanges have sanctioned trading limits based on fake collateral or 'non-funded' fixed deposits being offered as margin. Such dubious collateral poses a grave systemic risk for the markets although its depth and quantum remain partially undetermined as on date," said Sonam Chandwani, Managing Partner at KS Legal & Associates.

Sources said that clearing corporations have already taken up the matter with market regulator Stock Exchange Board of India (SEBI). But, the corporations themselves are sufficiently empowered to take a call on any issue that impacts their risk management practises.

The two major clearing corporations in India are National Securities Clearing Corporation (NSCCL) and Indian Clearing Corporation (ICCL). They are promoted by NSE and BSE respectively.

Under the current system of transactions on exchanges, a trader normally uses shares, MF units and FDs as collateral for allowing brokers to trade on their behalf. While shares work as the most popular form of collateral for individual traders, large business houses, insurance companies and MFs use FDs as collateral to proceed with high value transactions.

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