Margin Trading Facility rules: Sebi proposes higher broker net worth and wider funding options

Securities and Exchange Board of India (Sebi) has proposed changes to the Margin Trading Facility (MTF) rules. The consultation paper set out steps to tighten safeguards and adjust how brokers run MTF. Sebi also asked for public comments on the proposals till July 9. The review covered broker eligibility, funding, exposure limits, reporting, and client protections.

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A key proposal raised the minimum net worth for brokers offering MTF. Sebi suggested increasing the threshold from Rs 3 crore to Rs 5 crore. The regulator stated, "The minimum net-worth threshold for eligibility of the stock broker to offer MTF may be increased to Rs 5 crore\". Sebi also proposed allowing brokers structured as Limited Liability Partnerships (LLPs) to offer MTF.

Sebi MTF funding sources and broker rules

Sebi proposed broader funding options for brokers that provide margin trading. It suggested allowing borrowing through debt instruments, alongside existing sources. Sebi wrote, \"The sources of funds for offering MTF may be expanded to include borrowing through issuance of Non-Convertible Debentures NCDs or any other debt instruments by the broker, in addition to the existing permitted sources,\". This aimed to diversify funding avenues.

The regulator also proposed changing exposure norms under the MTF framework. Under the proposal, an amount equal to the lower of twice the minimum net worth for broking and 50 per cent of net worth stayed ring-fenced. Sebi proposed that the remaining net worth could be used for MTF. This would be within an overall exposure cap.

Sebi MTF flexibility on security classification changes

Sebi proposed relief when funded securities or collateral shift categories. Sebi said a 30-day rebalancing period may apply for compliance. This would cover cases where a security moves out of Group I. It would also apply if shifted to Trade-for-Trade. It would cover suspension from normal market trading for any reason.

On client concentration risk, Sebi suggested a softer approach for passive breaches. It said passive breaches of the single-client exposure limit may not count as violations. This applied under certain conditions. Brokers would need to restore compliance within 30 days. Brokers would also need to stop giving any extra MTF exposure to that client.

Sebi MTF reporting and client ledger changes

Sebi proposed changes to client documentation and reporting. It suggested standardising client agreements across exchanges. A uniform Rights and Obligations Document may be prepared jointly by all stock exchanges. Sebi said this would support uniformity and clarity for brokers and clients. Sebi also proposed T+1 reporting of MTF details, before pay-in timelines.

The regulator also proposed ledger changes for clients using margin trading. Sebi suggested allowing fungibility between normal and MTF client ledgers. Sebi said, \"Fungibility of unencumbered funds or securities between the normal ledger and the MTF ledger of a client may be permitted,\". This would allow easier movement of free cash or securities across ledgers.

On margin rules, Sebi rejected calls to reduce maintenance margins. Sebi said extra margin addressed wrong-way risk in such cases. The regulator proposed continuing the existing higher maintenance margin rule. Sebi referred to the existing requirement of higher maintenance margin VaR + 5 ELM. Sebi also noted MTF is limited to Group I equities and equity ETF units.

Sebi said a separate consultation paper will cover security classification rules. The new paper will review margin, collateral, MTF, and Securities Lending and Borrowing Mechanism (SLBM). For the current MTF proposals, Sebi has asked stakeholders to send comments by July 9. The proposals remain under consultation and may change after feedback.

With inputs from PTI