Definition
Pledge and Re-pledge
Pledge and re-pledge is the SEBI-mandated mechanism for using securities as collateral, where shares stay in the client's demat account and are pledged in favour of the broker, who re-pledges them to the clearing corporation.
After episodes of brokers misusing client securities, SEBI introduced a system in which collateral remains in the investor's own demat account and is merely flagged as pledged, rather than transferred to the broker. The broker then re-pledges it to the clearing corporation to obtain margin benefit.
This chain, client pledge to broker, broker re-pledge to clearing corporation, ensures securities cannot be diverted while still allowing them to serve as margin for MTF and derivatives positions. The client must authorise each pledge via an OTP, adding a strong consent and audit layer.
Related terms
- Clearing CorporationA clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
- Depository Participant (DP)A depository participant is an agent of a depository (NSDL or CDSL) through which investors open demat accounts and hold securities electronically, acting as the link between investors and the depository.
- Margin (Trading)Margin is the collateral a trader must deposit to cover potential losses on a position, comprising components such as SPAN, exposure and mark-to-market margin in the Indian derivatives market.
- Margin Trading Facility (MTF)Margin Trading Facility is a SEBI-regulated facility that lets investors buy shares by paying only part of the value upfront, with the broker funding the balance against the shares as collateral.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.