Sebi proposes to rework margin trading rules to contain risks

Synopsis

The Securities and Exchange Board of India (Sebi) has proposed significant changes to its margin trading facility (MTF) framework. These include increasing net-worth requirements for brokers and expanding funding sources to enhance risk controls. The regulator also suggested revising exposure limits and allowing greater collateral flexibility for MTF transactions.

Mumbai: The Securities and Exchange Board of India (Sebi) on Thursday proposed several changes to the margin trading facility (MTF) framework, including higher net-worth requirements for brokers and expanded funding sources, as part of a review aimed at strengthening risk controls while making it easier for brokers to offer the facility.

"In light of the growing volumes of trades under the margin trading facility, a review of the framework has been considered necessary to ensure continued robustness of risk management while facilitating ease of doing business," it said in a discussion paper.

In margin trading, investors can buy shares by paying only a part of the total value, with brokers financing the remainder at interest rates typically ranging from 9% to 15% annually.

Leverage is generally in the range of three to four times the initial margin, with investors pledging shares as collateral. The regulator proposed that the minimum net worth threshold for brokers offering MTF be increased from ₹3 crore to ₹5 crore. It also proposed allowing limited liability partnership structured brokers to offer the facility.

It suggested allowing brokers to raise funds for MTF through non-convertible debentures and other debt instruments, expanding the sources currently available to them. The regulator has also proposed revising exposure limits, permitting brokers to use a larger portion of their net worth for margin funding while requiring a part of the capital to remain ring-fenced for core broking operations.

The average margin trading funding (MTF) book across the NSE and BSE has been above ₹1.1 lakh crore in the past three months.

Further, it has also proposed allowing all forms of collateral accepted by clearing corporations in the cash market to be used for MTF transactions.

The regulator has suggested allowing fungibility between clients' regular trading and MTF accounts, enabling easier transfer of excess funds and securities. Brokers would also receive a 30-day window to rebalance positions if securities funded under MTF cease to meet eligibility requirements.

Currently, MTF is only available for shares and units of equity ETFs that are classified as 'Group I security'. Sebi is in the process of reviewing the group classification of securities.

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