What is Pledging and How Does it Work?

Post Date : December 19, 2024

What is Pledging and How Does it Work?

Pledging is a process that enables investors to use their existing holdings, such as stocks, ETFs, mutual funds, and government securities (e.g., T-Bills and SGBs), as collateral to obtain margins for trading. This is particularly helpful for users who may have limited cash margins but hold significant investments in their portfolio. By pledging their holdings, they can avoid missing out on trading opportunities.

How Pledging Works

When you pledge your shares or other securities, a percentage of their value is deducted as a haircut. The remaining value, called the collateral margin, can be used for:

• Equity Intraday Trading
• Futures and Options Writing (Equity and Currency F&O)

However, there are certain restrictions:

• Collateral margins cannot be used for options buying.
• Trading in commodity futures and options (MCX/NCO) is not allowed using collateral margins.

To begin pledging your securities, visit: How to Pledge Shares with RMoney Quick App?

Key Details about Pledging

• Clearing Negative Balances: Collateral margins cannot be utilized unless any negative balance in your account is cleared.

• Haircut and Margin Calculation: The collateral margin is calculated based on the previous closing price of the pledged securities after applying the haircut. This amount is then added to your total margin and displayed under the Collateral heading in the Funds section of your trading platform.

• Cash vs. Non-Cash Margins: The exchanges mandate that 50% of the required margin for F&O positions must be in cash or cash-equivalent collateral, while the remaining 50% can be in non-cash collateral.

• Delayed Payment Charges: If the cash margin requirement for overnight positions is not met, and non-cash collateral is used to make up the shortfall, a delayed payment charge of 0.035% per day or 12.775% annually is applicable on the shortfall amount.

Example Scenario

Suppose you need a margin of ₹1,00,000 to maintain your positions. In this case:

• A minimum of ₹50,000 must be available in cash, even if you have sufficient collateral margin.
• If the cash margin shortfall isn’t covered, the shortfall amount will be treated as a debit balance, and delayed payment charges will be applied.

Approved Instruments for Pledging

The list of approved securities and their respective haircut percentages can be found in the relevant guidelines. Ensure that your holdings meet these requirements before pledging.

Additional Features and Benefits

• Instant Sale of Pledged Holdings: Pledged securities can be sold immediately without needing to place an unpledged request. This provides flexibility and ensures liquidity when required.
• Treasury Bills (T-Bills): T-Bills with maturities of 364 and 182 days can now be pledged for collateral margins. T-Bills with a maturity of 91 days will soon be eligible.