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Sebi issues comprehensive norms on margin trading facility

Sebi has 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.

The markets regulator said in a circular that only corporate brokers with net worth of at least Rs 3 crore are eligible for providing MTF to their clients. The brokers would have to submit to the exchange a half-yearly certificate from an auditor confirming the net worth.

For providing MTF, a broker may use his own funds or borrow from scheduled commercial banks or NBFCs regulated by Reserve Bank of India. A broker is not allowed to borrow funds from any other source. Further, it said, 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 have to disclose to the stock exchange the details on gross exposure including name of the clients and the PAN, category of holding (promoter-non- promoter), name of the scrips (Collateral and funded) and if they have borrowed funds for the facility, name of the lenders and amount borrowed.

At any point of time, the total indebtedness of a broker should not exceed five times of its net worth. The "total exposure" of the broker towards MTF should not exceed the borrowed funds and 50 per cent of his net worth.

Brokers have to ensure that the exposure to a single client does not exceed 10 per cent of the "total exposure" of the broker. Besides, exposure towards stocks purchased under MTF and collateral kept in the form of stocks need to be well diversified.
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