SEBI Unveils Major MTF Review: Brokers' Limits and Collateral Rules Set for Overhaul

SEBI Unveils Major MTF Review: Brokers' Limits and Collateral Rules Set for Overhaul​

SEBI has released a comprehensive Consultation Paper outlining significant proposals for the review of the Margin Trading Facility (MTF) Framework. The move is aimed at enhancing operational efficiency, ensuring continued robust risk management, and addressing complex risks within the highly leveraged trading segment.

The public is invited to provide feedback on various proposed changes concerning collateral types, broker eligibility criteria, and fund usage rules under the revamped MTF framework.

Why is the MTF Framework Under Review?​

Introduced in 2004, the MTF framework has undergone continuous updates to accommodate market growth. A comprehensive review was previously conducted in 2017, followed by amendments in 2022 that allowed Group I securities and Equity ETF units to be used as collateral.

A key complexity arose from subsequent changes permitting cash collaterals to be used for MTF positions. This created the issue of Wrong-way Risk, where the funded stock itself is employed as margin for the transaction. To mitigate this risk while accommodating increased volume, the Margin Trading Facility (MTF) rules are now under intense scrutiny and review by SEBI's Secondary Market Advisory Committee (SMAC).

Significant Changes to Collateral and Broker Eligibility​

The proposals introduce several critical changes pertaining to collateral eligibility and broker standards. Previously, initial margin required cash or equity shares. The proposed update suggests uniformity, allowing collaterals accepted in the normal cash market to be used for both Cash and MTF transactions.

Furthermore, EPI sell credits are being considered as potential collateral for fresh MTF positions. This is subject to specific conditions: specifically, relating to the unencumbered (unfunded) portion of the sale value, and post-recovery of any outstanding lending amounts from the stock's sale proceeds.

A major change in eligibility criteria impacts broker operational standards. The minimum net-worth threshold for brokers wishing to offer MTF is proposed to be raised from ₹ 3.00 crore to ₹ 5 Crore. Additionally, the framework now proposes expanding eligibility beyond corporate brokers to include Limited Liability Partnerships (LLPs).

Focus on Operational Transparency and Risk Mitigation​

The proposed changes mandate a greater degree of operational transparency across the trading ecosystem. SEBI is proposing that Stock Brokers report detailed MTF exposure information to Stock Exchanges daily. This includes client details, holding categories, PAN, scrip names, and any borrowed funds used for the facility.

Regarding risk mitigation, the proposal reaffirms the requirement for higher maintenance margins in specific scenarios. In cases where a funded stock is considered as maintenance margin using cash collateral paid by the client, the applicable margin must be VaR + 5 times Extreme Loss Margin (ELM). This stricter measure is intended to counteract the Wrong-way Risk inherent when the collateral and the funded exposure are derived from the same security.

Fund Sources and Exposure Limits Explained​

Regarding funding, Stock Brokers may utilize their own funds, borrow from scheduled commercial banks or RBI regulated NBFCs, issue Commercial Papers (CPs), or take unsecured loans from promoters and directors. The proposal suggests expanding these permitted sources to include borrowing through Non-Convertible Debentures (NCDs) or other debt instruments by the broker.

The maximum allowable exposure of a broker toward MTF is proposed to be subject to refined prudential limits. Instead of exceeding borrowed funds and 50% of net worth, the exposure may now exceed them within an overall limit set at 5.5 times the broker's net worth. A secondary measure allows for passive breaches of the single-client exposure limit, provided remedial action is taken within a defined period.

Investor Feedback Requested on Key Proposals​

The Consultation Paper solicits specific feedback from market participants on nearly every facet of the revised MTF framework. Questions cover:

Whether participants agree with the proposed changes regarding collateral forms (8.1), rebalancing periods following security category shifts (8.2), and the mandatory nature of a joint Rights and Obligations (R&O) Document (8.3).

Questions also probe agreement on expanded funding sources (8.4), revised exposure limits (8.5), and the mechanics of passive breach management (8.6). Stakeholders are also asked for input on broker eligibility standards, disclosure requirements, fund transfer rules between MTF and non-MTF ledgers, and the nuances of funded stock as maintenance margin.

The public is advised to submit their comments by July 09, 2026, via the dedicated SEBI portal or through email.