Sebi Overhauls Margin Trading Facility: Broader Funding Options and Higher Net Worth Mandates Proposed in Major Regulatory Review

Sebi Overhauls Margin Trading Facility: Broader Funding Options and Higher Net Worth Mandates Proposed in Major Regulatory Review​

The Securities and Exchange Board of India (Sebi) has proposed a sweeping overhaul of the Margin Trading Facility (MTF) framework, aiming to significantly strengthen and professionalize the mechanism. Through its consultation paper, Sebi laid out several critical changes covering broker eligibility, funding diversification, exposure norms, and client protection measures.

##Raising Broker Net-Worth Threshold

A core proposal from the regulator involves enhancing the financial stability of brokerage firms offering MTF services. Sebi proposed increasing the minimum net-worth threshold for brokers providing MTF operations. The existing requirement of Rs 3 crore would be raised to a new standard of Rs 5 crore. This move is intended to ensure that only financially robust entities manage the high-risk nature of margin trading.

##Expanding Funding Avenues and Operational Flexibility

To diversify resources, Sebi suggested permitting brokers to tap into debt markets for MTF funding. Brokers would now be allowed to raise funds through debt instruments, including the issuance of Non-Convertible Debentures (NCDs) or other suitable debt instruments, alongside current permitted sources. Furthermore, the regulator proposed allowing Limited Liability Partnerships (LLPs) structured entities to offer margin trading services.

##Revising Exposure Norms and Risk Management

The proposal includes detailed adjustments to MTF exposure norms for brokers. A specific amount related to risk management must be ring-fenced. This reserved portion will be equal to the lower of 50 per cent of net worth or twice the minimum net worth required for broking operations. The remaining eligible net worth can then be deployed for MTF within an overall established exposure cap.

##Streamlining Client Protection and Reporting

Sebi introduced provisions aimed at smoothing operational challenges related to security classifications and client compliance. For instance, a rebalancing period of 30 days may be granted to the stock broker if a security funded under MTF changes category. This applies if the security moves out of Group I, shifts to Trade-for-Trade status, or is temporarily suspended from normal market trading.

##Addressing Concentration Risks and Ledger Fungibility

In terms of client risk, Sebi sought to refine rules around exposure limits. Passive breaches of the existing single-client exposure limit would not automatically constitute a violation under certain defined conditions. Brokers are required in such instances to ensure compliance within 30 days and must refrain from extending any additional MTF exposure to that client during that period.

The regulator also proposed allowing fungibility between normal and MTF client ledgers. This means that unencumbered funds or securities held in the standard client ledger could be used interchangeably with those held in the MTF ledger for a single client.

##Maintenance Margin Requirements Remain Firm

Sebi explicitly addressed margin requirements where client cash is utilized for pay-in, with funded securities acting as collateral. The regulator rejected suggestions to reduce maintenance margins. Sebi maintained that the additional margin requirement addresses wrong-way risk and proposed that the existing higher maintenance margin (VaR + 5 ELM) should continue in effect.

The regulatory framework established by Sebi pertains exclusively to equity shares and units of equity ETFs classified as Group I securities currently. The Securities and Exchange Board of India has sought public comments on these proposals until July 9.