Securities and Exchange Board of India (SEBI) issued a comprehensive framework on margin trading facility (MTF) including disclosure norms and eligibility requirements for brokers to provide it to clients.

The facility is executed with borrowed funds or securities that enable investors to take exposure in the market over and above their resources.

Only corporate brokers having net worth of at least Rs 3 crore are eligible for providing MTF to their clients. The brokers would have to submit a half-yearly certificate from an auditor confirming the net worth to the exchange, said the market regulator.

Read also: SEBI: small firms going to strictly monitor for IPO proceeds

MTF will be provided by a broker by using his own funds or borrow from scheduled commercial banks or non-banking financial companies regulated by Reserve Bank of India. A broker is not allowed to borrow funds from any other source.

It said further that brokers would not use the funds of any client for providing the facility to another client, even if the same is authorised by the first client.

In addition, brokers will have to disclose to the stock exchange the details related to the name of the clients, the PAN, name of the script (collateral and funded), category of holding (promoter-non- promoter) and if they have borrowed funds for the facility, amount borrowed and name of the lenders.

Read also: P-note investors likely to invest in Indian markets directly

The total indebtedness of a broker should not exceed five times of its net worth at any point of time.

The total exposure of the broker towards MTF should not exceed the borrowed funds and 50% of his net worth. Brokers will have to ensure that the exposure to a single client does not exceed 10% of the “total exposure” of the broker.

MTF is available for Group 1 securities and those that meet the conditions for inclusion in the derivatives segment of the stock exchanges.

 SEBI said that initial margin should be based on Value at Risk (VaR) plus three times of applicable Extreme Loss Margin (ELM) for Group I stocks in the F&O Segment

Besides, for Group I stock other than F&O stocks, the initial margin would VaR in addition to five times of applicable ELM.

SEBI stated, “The stocks deposited as collateral with the stock broker for availing margin trading facility (collaterals) and the stocks purchased under the margin trading facility (funded stocks) shall be identifiable separately and no co-mingling shall be permitted for the purpose of computing funding amount”.

Brokers will have to list out conditions in which the securities may be liquidated and such situations would be included in the Rights and Obligations Document. However the broker would not liquidate securities of client in any situation other than the conditions stipulated. Brokers will have to maintain separate client-wise ledgers for funds and securities of clients availing margin trading facility.

SEBI added further, “Any disputes arising between the client and the stock broker in connection with the margin trading facility shall have the same treatment as normal trades and should be covered under the investor grievance redressal mechanism, arbitration mechanism of the stock exchange”.

The post SEBI issues norms on Margin trading facility appeared first on Mcr World.