Sebi proposes easing margin trading funding rules, tighter broker norms

In a consultation paper released on Wednesday, the market regulator invited public comments on a package of reforms. These include expanding funding avenues for brokers, increasing the minimum net-worth requirement to offer MTF, permitting limited liability partnerships (LLPs) to provide the facility, and streamlining collateral management.

Sebi said the review was necessary in light of the growing scale of MTF transactions to ensure the framework remains robust while promoting ease of doing business.

Among the key proposals is an increase in the minimum net-worth requirement for brokers offering MTF to Rs 5 crore from the current Rs 3 crore. The regulator has also proposed allowing brokers operating as LLPs to offer margin trading, expanding the eligibility beyond corporate brokers.

To widen funding options, Sebi suggested permitting brokers to raise money through non-convertible debentures (NCDs) and other debt instruments in addition to existing sources such as bank borrowings, NBFC loans, commercial papers and promoter loans.

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The regulator has also proposed changes to collateral rules. It plans to allow all collateral currently accepted by clearing corporations in the cash market to be used uniformly for MTF transactions. In addition, early pay-in (EPI) sell credits could be accepted as collateral for fresh MTF positions under specified conditions.
To address operational challenges arising from stock reclassification, SEBI has proposed a 30-day rebalancing window if a funded security moves out of the Group I category, shifts to the trade-for-trade segment or is suspended from normal trading.On broker exposure limits, Sebi has suggested retaining a portion of brokers’ net worth exclusively for core broking operations while allowing the balance to be deployed for MTF. The overall exposure would remain capped at 5.5 times the broker’s net worth.

The consultation paper also proposes relief for brokers in cases of passive breaches of client-level exposure limits. Where a client’s exposure exceeds regulatory limits solely because the broker’s total MTF exposure declines, brokers would be given 30 days to restore compliance, during which no fresh exposure can be extended to that client.

To improve standardisation, Sebi has proposed a common Rights and Obligations document for MTF clients across all stock exchanges instead of exchange-specific formats. Other proposals include allowing fungibility between MTF and non-MTF client ledgers, permitting periodic settlement of excess cash collateral, enabling auto-pledge of funded shares used as maintenance margin and revising reporting timelines for brokers.

The regulator said the proposals were formulated after discussions with the Brokers’ Industry Standards Forum, market participants and the Secondary Market Advisory Committee. Public comments on the consultation paper have been invited before the proposals are finalised.

Capital markets regulator has proposed a series of changes to the Margin Trading Facility (MTF) framework aimed at improving operational efficiency for brokers while strengthening risk management amid rising trading volumes.

In a consultation paper released on Wednesday, the market regulator invited public comments on a package of reforms. These include expanding funding avenues for brokers, increasing the minimum net-worth requirement to offer MTF, permitting limited liability partnerships (LLPs) to provide the facility, and streamlining collateral management.

Sebi said the review was necessary in light of the growing scale of MTF transactions to ensure the framework remains robust while promoting ease of doing business.

Among the key proposals is an increase in the minimum net-worth requirement for brokers offering MTF to Rs 5 crore from the current Rs 3 crore. The regulator has also proposed allowing brokers operating as LLPs to offer margin trading, expanding the eligibility beyond corporate brokers.

To widen funding options, Sebi suggested permitting brokers to raise money through non-convertible debentures (NCDs) and other debt instruments in addition to existing sources such as bank borrowings, NBFC loans, commercial papers and promoter loans.

The regulator has also proposed changes to collateral rules. It plans to allow all collateral currently accepted by clearing corporations in the cash market to be used uniformly for MTF transactions. In addition, early pay-in (EPI) sell credits could be accepted as collateral for fresh MTF positions under specified conditions.

To address operational challenges arising from stock reclassification, SEBI has proposed a 30-day rebalancing window if a funded security moves out of the Group I category, shifts to the trade-for-trade segment or is suspended from normal trading.

On broker exposure limits, Sebi has suggested retaining a portion of brokers’ net worth exclusively for core broking operations while allowing the balance to be deployed for MTF. The overall exposure would remain capped at 5.5 times the broker’s net worth.

The consultation paper also proposes relief for brokers in cases of passive breaches of client-level exposure limits. Where a client’s exposure exceeds regulatory limits solely because the broker’s total MTF exposure declines, brokers would be given 30 days to restore compliance, during which no fresh exposure can be extended to that client.

To improve standardisation, Sebi has proposed a common Rights and Obligations document for MTF clients across all stock exchanges instead of exchange-specific formats. Other proposals include allowing fungibility between MTF and non-MTF client ledgers, permitting periodic settlement of excess cash collateral, enabling auto-pledge of funded shares used as maintenance margin and revising reporting timelines for brokers.

The regulator said the proposals were formulated after discussions with the Brokers’ Industry Standards Forum, market participants and the Secondary Market Advisory Committee. Public comments on the consultation paper have been invited before the proposals are finalised.