SEBI proposes overhaul of margin trading rules as MTF volumes rise

The Securities and Exchange Board of India (SEBI) has proposed a series of changes to the Margin Trading Facility (MTF) framework, including broader funding options for brokers, higher exposure limits and operational relaxations, as trading volumes under the facility continue to grow.

In a consultation paper issued on June 18, the market regulator said the review is aimed at strengthening risk management while improving ease of doing business for market participants. Public comments on the proposals have been invited until July 9.

Among the key proposals, SEBI has suggested 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.

The regulator has also proposed allowing brokers to raise funds through Non-Convertible Debentures (NCDs) and other debt instruments for offering margin trading facilities, in addition to the currently permitted sources such as bank borrowings, NBFC loans and commercial paper.

In a significant change, 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.

SEBI has also 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.

To address situations where eligible securities lose their status for margin funding, SEBI has proposed providing brokers a 30-day rebalancing window when a security moves out of the Group I category, shifts to the trade-for-trade segment or becomes unavailable for normal trading.

The regulator has further suggested introducing a uniform Rights and Obligations document across all stock exchanges to improve clarity and consistency for brokers and clients.

Other proposals include allowing fungibility between normal and MTF client ledgers, permitting periodic settlement of excess cash collateral and introducing operational changes to reporting and client exposure management.

However, SEBI has decided against reducing maintenance margin requirements in cases where cash collateral is used for pay-in and the same funded stock is used as collateral. The regulator said the higher margin requirement should continue because of the "wrong-way risk" arising from a simultaneous fall in the value of both the funded stock and the collateral.

SEBI noted that MTF is currently available only for Group I equity shares and equity ETFs, while a separate review of security classification norms for margining, collateral and securities lending is also underway.