ETF units can now be taken as collateral by brokers for Margin Trading Facility

2 Dec 2022 , 07:54 AM

The capital markets regulator, SEBI, has given brokers permission to utilize equities exchange-traded funds (ETFs) as collateral and to expand the margin trading facility (MTF) to include them. Brokers only currently provide the MTF option for a limited number of stocks that fall under the category of Group 1 securities.

It has been decided to accept units of equity exchange-traded funds (equity ETFs) as an eligible security for MTF as well as an eligible collateral under MTF, according to a circular from SEBI. “Taking into account the emergence of ETFs as an investment product with various advantages such as transparency, diversification, lower cost, etc.,” the circular stated.

The facility is carried out with borrowed money or assets, allowing investors to participate in the market beyond their means.

According to SEBI, the client’s initial margin payment to the stock broker shall be made in cash, cash equivalents, or equity ETFs.

Additionally, no mixing of the stocks or units of equity ETFs will be allowed when calculating the funding amount between the stocks or units of equity ETFs purchased under the funded stocks and the stocks or units of equity ETFs deposited as collateral with the stock broker for the purpose of availing collaterals.

Stock brokers will be required to make sure that exposure to stocks and units of equity ETFs purchased via the MTF and collateral held in the form of stocks and units of equities ETFs are appropriately diversified while offering the MTF, according to Sebi.

In this regard, stock brokers will be obliged to have the proper board-approved policies.

A stock broker may use their own funds, borrow money from scheduled commercial banks or NBFCs under RBI regulation, issue Commercial Papers (CPs), or obtain unsecured long-term loans from their promoters and directors in order to provide the MTF.

According to the Securities and Exchange Board of India (SEBI), the circular would be effective starting on December 30.

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