Margin trading: Regulator Prescribed Norms For Stockbrokers

Are you an active intraday trader? If yes, you may have availed of the Margin Trading Facility (MTF) at some point in time, especially when you desired to take large positions in the market. Even if you are new to the stock markets, knowing about margin trades and regulations may help you garner higher profits from stock trades.

So, what exactly is a margin trading facility? Margin trading is an intraday trading strategy that enables you to purchase shares that you cannot afford otherwise. You have to pay an upfront margin, a part of the actual value of the shares, and your broker will pay the remaining amount. The upfront margin can be paid in the form of cash or securities. Your securities will act as collateral for the amount borrowed from your broker. 

As per SEBI rules, you require a Demat account and trading account to engage in stock market trades, including margin trades. You can go with free trading account along with a free Demat account online. Opening a free trading account and a Demat account is a simple process. 

However, brokers will collect some Demat transaction charges like annual maintenance charges, pledge creation fees, dematerialization & rematerialization charges, etc., for various services offered by them. 

Norms prescribed by SEBI for Margin Trading Facility

  • Basic guidelines

First and foremost, only brokers with a minimum net worth of Rs 3 crores can provide a margin trading facility. Moreover, brokers’ total indebtedness should exceed 5 times their net worth at no point in time.

Brokers are permitted to either use their funds or money borrowed from authorized banks in India to provide MTF to their respective clientele. SEBI strictly refrains them from utilizing the MTF of one client for another. Plus, they also have to furnish the details of their total MTF exposure to SEBI and complete information of clients availing of the margin trading facility. 

The securities that are eligible for margin trading are pre-determined by SEBI. You have to create an MTF account with your broker and maintain a minimum balance therein. Failure to do so may lead to liquidation of your securities to maintain the stipulated balance in your MTF account.

  • Recent regulatory changes

With effect from December 1, 2020, SEBI has mandated brokers to collect upfront margins from their clients. This regulatory move mainly aims at discouraging brokers from facilitating unrestrained leverage to their clients. SEBI has also notified exchanges to manage maximum margins from stock traders based on intraday audits instead of the day-end monitoring system followed previously.

From March 1, 2021, SEBI has hiked the upfront margin requirements to 50% from 

25%. Under this newly adopted peak margin system by SEBI, the regulator plans to raise the margin requirements to 75% by the end of August 2021. In September 2021, the final phase will be implemented wherein SEBI will double the upfront margin limits, hike the margin requirements to 100%.

These upfront margins include Value-at-Risk (VaR) and Extreme Loss Margins (ELMs) that brokers must collect from their clients. The following table represents a snapshot of the breach of margin limits that will attract penalty charges for brokers.

 

Phase Time Period Margin Limit
1 December 2020 – February 2021 Margin > 25% of (VaR + ELM)
2 March – May 2021 Margin > 50% of (VaR + ELM)
June – July 2021 Margin > 70% of (VaR + ELM)
3 From August 2021 onwards Margin > sum total of VaR and ELM

  • Online trading platform

You should open online demat and trading accounts with a brokerage firm that provides you a fast, secure, simple and robust online trading platform.

Online trading platform is a perfect combination of technology, simplicity and cost-efficiency, apt for both retail and institutional investors.

  • Value added features
  • MTF

MTF is an arrangement wherein your security purchase is partly funded by you and partly by your broker. 

Brokers charge a nominal interest rate of 0.05% per day on borrowed margin money thereby increasing your investment potential manifold.

  • TPIN verification

A TPIN verification makes your demat account more secure. Very few DPs have this authentication system. 

Many brokers have recently introduced a TPIN authorization for your ‘sell’ transactions. The need for a Power of Attorney (POA) or Physical Delivery Instruction slip is thereby eliminated.

  • Loan Against Security(LAS)

An LAS facility allows you to procure loans from the broker by pledging your digital securities. LAS facility enables you to borrow funds.

Thus, these are some parameters to evaluate a broker.

Final Words

With the new regulatory changes pertaining to margin trading facility, SEBI intends to limit intraday trades and restrict the entry of traders with excessive leverage. Moreover, it aims to create a fair and equitable system for brokers. Since the new reforms, some volume shifts have been observed in the commodities and equity markets, including the derivative segments. In short, SEBI’s imposed ceilings on margins will lead to the development of fair and efficient stock markets, broking, and trading systems in the long run. 

As an investor in stock markets, your prime transaction cost is brokerage charges. So you must choose a service provider who charges low brokerage fees.