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When you trade in the stock market, you can take positions higher than the real cash in your account by using collateral. Collateral is like a security deposit – it can be certain investments you pledge to your broker.
As your broker, we pass this collateral to the clearing corporation, allowing you to take larger trades. But not all collateral works the same way, especially when it comes to covering losses quickly.
The Three Buckets You Need to Know
Think of your available margin as coming from three different buckets.
1. Free Cash Balance (Real Cash)
– Money already sitting in your trading account.
– Can be used instantly to pay mark-to-market (MTM) losses or margin shortfalls.
– Can be withdrawn anytime.
– Most reliable buffer to avoid penalties or forced square-offs.
2. Cash-Equivalent Collateral
– Examples: Liquid mutual funds, government securities (G-Secs), treasury bills, fixed deposits pledged to your broker.
– Clearing corporation treats them like “cash” for margin purposes – so no 50:50 rule.
– But: They are still pledged assets, not instant cash. They must be sold or redeemed to cash, which takes time.
3. Non-Cash Collateral
– Examples: Shares, ETFs, corporate bonds, equity mutual funds.
– 50:50 Rule applies – you can only use their margin value if you have an equal value in Free Cash + Cash-Equivalent Collateral.
– This ensures there’s enough liquid value for covering losses quickly.
The 50:50 Rule – Simple Example
If you pledge non-cash equivalent shares worth ₹1,00,000 (after haircut) and you have only ₹50,000 in Free Cash + Cash-Equivalent Collateral, you can use only ₹1,00,000 for trading, not ₹1,50,000.
Why Real Cash Still Matters- and How Delays Impact Everyone
Some traders keep only pledged collateral (cash-equivalent or non-cash) and limited/no real cash. This creates a real challenge for covering MTM losses.
Here’s the process and problem:
1. Loss Happens Today- At the end of the trading day, the exchange calculates MTM gains and losses for each client.
2. We Pay the Clearing Corporation Next Morning (BOD)- As your broker, we must settle all MTM losses with the clearing corporation at the beginning of the next trading day – regardless of whether you have paid us yet.
3. Our Funds Get Blocked Until We Recover From You- If you don’t have enough real cash in your account, we must sell your pledged collateral to recover the loss amount. This takes time:
– eDIS pledge → needs your OTP before we sell.
– Settlement cycle → shares credited on T+1, mutual funds or debt may take 1–3 days.
4. During This Time, Our Money Is Tied Up- Until we collect the MTM loss amount from you or your collateral sale settles, our funds remain blocked.
5. If the Shortfall Is Large- We may be forced to square off your positions to protect both sides, sometimes at unfavourable prices.
DDPI vs eDIS – Why It Matters for Speed
Method | How It Works | Liquidation in Emergency |
DDPI | One-time authorization allowing the broker to sell pledged securities without asking you every time | liquidation possible |
eDIS | You approve each sale with OTP | Slower- Needs your approval before we sell |
Best Practices for Safe Trading
– Keep some real cash in your account – even if you pledge a lot of collateral.
– Use a mix of cash-equivalent and non-cash collateral.
– Monitor your MTM losses and top up cash before the next morning’s settlement.
Should the 50:50 Rule Apply to Cash-Equivalent Collateral Too?
Right now, the 50:50 rule applies only to non-cash collateral like shares and equity mutual funds. This means traders can pledge only cash-equivalent collateral (like liquid mutual funds, G-Secs, T-bills) and still take positions without keeping any real cash.
But here’s something to think about:
- Cash-equivalent collateral is still not instant cash – it takes time to sell and settle.
- In volatile markets, this delay can create the same funding and settlement risks for the broker as non-cash collateral.
- If a 50:50 requirement was applied to cash-equivalent collateral as well, it would:
– Enforce discipline – Clients would always keep some real cash available for obligations.
– Reduce broker funding strain – Less risk of the broker’s own funds being blocked for MTM settlements.
– Cover 50% of the risk instantly – Because the real cash portion could be used immediately for next-day clearing obligations.
We are actively exploring this idea as a first mover in the broking industry – because we believe it can make the trading environment safer and healthier for everyone.
If both the broker and client face lower risk with a 50:50 approach, isn’t that a smarter way to trade for the long run?