Brokerage houses insist on a demat account for derivatives trading   

April 2, 2010

A derivatives trading account has nothing to with a demat account. A demat account is needed to transact in shares in the cash segment where deliveries of shares have to be received and given. A derivatives account allows one to trade in the futures and options segment where no deliveries are possible. An investor dealing in derivatives can pay the margin by cheque and transact to the extent his account balance allows him to. The only time demat and derivatives can get linked is when an investor prefers to offer his stocks as margin for derivatives trading.

Even then, it would not be mandatory to open a demat account with the same broker where derivatives trading is done. However, some brokerage firms are insisting on a demat account even for opening an account in the derivatives segment.

Recently, MF Global India Private Ltd, a leading brokerage house providing exchange and over-the-counter derivatives services, refused to open a client’s account because he only wanted to trade in the derivatives segment. The client’s application was refused on the grounds that it is mandatory to open a demat account with MF Global even when the client has no intention to buy and sell shares.

“It is not mandatory to open a demat account to trade only in the derivatives segment. It is not our internal policy to compulsorily open demat accounts for our trading clients,” said Sandeep Gupta, compliance officer, MF Global, in an email sent to Moneylife. On the specific issue cited above, Mr Gupta could not be reached for his comments today.

“They ask you to open the demat account in advance in case if you trade in the cash segment in the future. If a client only wants to deal in derivatives, then it is not mandatory,” said Ketan Malkan, senior vice president, India Infoline Ltd.

“One can open as many demat accounts as one wants. We insist on having a demat account because the derivatives segment is a big game compared to the cash segment. If the market crashes or client loses we can use the stocks as collateral,” said a top official of a Mumbai-based brokerage house.

“Currently, it’s not necessary, but it may become mandatory in the future if investors have an option of physical settlement of derivatives trade,” said Alok Churiwala of Churiwala Securities Ltd.  — Ravi Samalad