Margin Trading Facility for Stock Brokers — Eligibility, Net Worth & Leverage Limits
Stock brokers offering Margin Trading Facility (MTF) must meet specific eligibility criteria, including minimum net worth and leverage limits. MTF allows investors to purchase securities by paying a margin amount, with the broker funding the balance. This article explains the eligibility requirements, the net worth thresholds, the leverage limits, and the proposed changes to the MTF framework.
What Is Margin Trading Facility?
Margin Trading Facility (MTF) is a facility that allows investors to buy securities by paying a margin amount (typically 25-50% of the transaction value) while the broker funds the remaining amount. The purchased securities are held as collateral. Leverage is generally in the range of three to four times the initial margin, with investors pledging shares as collateral.
Eligibility Requirements for Stock Brokers
Current Requirements
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Corporate Structure. Only corporate stock brokers with a net worth of at least ₹3 crore are eligible to offer margin trading facility to their clients.
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Net Worth Certificate. The stock brokers shall submit to the Stock Exchange a half-yearly certificate, as on 31st March and 30th September of each year, from an auditor confirming the net worth. Such a certificate shall be submitted not later than 31st May and 15th November every year.
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Prior Permission. The stock brokers wishing to extend margin trading facility to their clients shall be required to obtain prior permission from the exchange where the margin trading facility is proposed to be offered.
Proposed Changes
SEBI has proposed increasing the minimum net-worth requirement for brokers offering MTF from ₹3 crore to ₹5 crore.
Additionally, Limited Liability Partnerships (LLPs) could be permitted to offer margin trading facilities, a privilege currently restricted to corporate brokers.
Eligible Securities
Current Eligibility
Equity shares and units of Equity Exchange Traded Funds (ETFs) that are classified as 'Group I security' shall be eligible for margin trading facility. Group I securities are liquid securities which are traded at least eighty percent of the days over the previous six months and impact cost for which over the previous six months is less than or equal to one percent.
Proposed Changes
SEBI has proposed expanding the forms of collateral that can be used for margin trading and allowing brokers to accept certain Early Pay-In (EPI) sale credits as collateral for fresh MTF positions under specified conditions.
Margin Requirements
Initial Margin
Category of Stock | Applicable Margin stocks available for trading in the F&O Segment | VaR + 3 times of applicable ELM stocks other than F&O stocks and units of Equity ETFs | VaR + 5 times of applicable ELM
Form of Margin
The initial margin payable by the client to the stock broker shall be in the form of:
- Cash.
- Cash equivalent.
- Group I equity shares or units of Group I Equity ETFs, with appropriate haircut as specified by SEBI.
Leverage and Exposure Limits
Current Limits
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Total Indebtedness. At any point of time, the total indebtedness of a stock broker for the purpose of margin trading shall not exceed five times of its net worth.
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Maximum Allowable Exposure. The maximum allowable exposure of the broker towards the margin trading facility shall be within the self-imposed prudential limits and shall not, in any case, exceed the borrowed funds and fifty percent of his "net worth".
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Single Client Exposure. Exposure to any single client at any point of time shall not exceed ten percent of the broker's maximum allowable exposure.
Proposed Changes
SEBI has proposed revising broker exposure limits under MTF. The regulator suggested allowing brokers to deploy a larger portion of their net worth towards margin funding, subject to ring-fencing a minimum capital buffer and an overall exposure cap of 5.5 times net worth.
Sources of Funds
Permitted Sources
For the purpose of providing the margin trading facility, a stock broker may use:
- Own funds.
- Borrow funds from scheduled commercial banks and/or NBFCs regulated by the Reserve Bank of India.
- Borrow funds by way of issuance of Commercial Papers (CPs).
- Unsecured long term loans from their promoters and directors.
Proposed Changes
SEBI has proposed allowing brokers to raise funds through Non-Convertible Debentures (NCDs) and other debt instruments for offering margin trading facilities.
Prohibited Practices
- A stock broker shall not be permitted to borrow funds from any other source, other than the permitted sources.
- The stock broker shall not use the funds of any client for providing the margin trading facility to another client, even if the same is authorized by the first client.
How We Help
At Anuj Desai & Associates, we help stock brokers establish and operate Margin Trading Facilities, ensure compliance with SEBI's eligibility and leverage requirements, and prepare for the proposed changes. If you need assistance with MTF compliance, reach out to our regulatory compliance desk.