Equity ETFs can now be used as collateral for margin trading facility
2 min read . Updated: 01 Dec 2022, 04:56 PM IST
PremiumSebi permits brokers to extend margin trading facility to equity ETFs
The Securities and Exchange Board of India (SEBI), has given brokers authorization to utilise equity exchange-traded funds (ETFs) as collateral and to broaden the margin trading facility (MTF) to include them.
Based on the feedback received from market participants, recommendation of Secondary Market Advisory Committee (SMAC) of SEBI and taking into account the emergence of Exchange Traded Funds (ETFs) as an investment product with various advantages such as transparency, diversification, lower cost, etc., it has been decided to allow units of Equity Exchange Traded Funds (Equity ETFs)categorized as Group-I security as an eligible security for MTF as well as an eligible collateral under MTF, said the statutory body in a press note.
Brokers only currently provide the MTF option for a limited number of stocks that fall under the category of Group 1 securities. “Equity shares and units of Equity ETFs that are classified as 'Group I security' as per SEBI circular MRD/DoP/SE/Cir-07/2005 dated February 23, 2005 shall be eligible for MTF," said SEBI in a note.
According to SEBI, in order to avail MTF, initial margin required shall be VaR + 3 times of applicable ELM for Group I stocks available for trading in the F&O Segment and VaR + 5 times of applicable ELM for Group I stocks other than F&O stocks and units of Equity ETFs. The applicable VaR and ELM for the aforementioned purpose must be the same as in the cash segment for a particular stock, as per the guidelines set by SEBI. The initial margin payable by the client to the stock broker shall be in the form of cash, cash equivalent, or Group I equity shares or units of Group I Equity ETFs, said the statutory body.
SEBI has said in an announcement that “The stocks or units of Equity ETFs deposited as collateral with the stock broker for availing MTF(‘Collaterals’) and the stocks or units of Equity ETFs purchased under the MTF(‘Funded stocks’) shall be identifiable separately and no comingling shall be permitted for the purpose of computation of funding amount."
SEBI has further said in a press release that "While providing the MTF, the stock broker shall ensure that exposure towards stocks and/or units of Equity ETFs purchased under MTF and collateral kept in the form of stocks and/or units of Equity ETFs are well diversified. Stock brokers shall have appropriate Board approved policy in this regard."
For the purpose of applicable haircuts for units of Equity ETFs as collateral for MTF, it is clarified that the haircuts applicable to Liquid (Group I) Equity Shares (under “Other Liquid Assets" category) shall be applicable to units of Equity ETFs, as per SEBI.
“For the purpose of providing the MTF, a stock broker may use own funds, borrow funds from scheduled commercial banks and/ or NBFCs regulated by RBI, borrow funds by way of issuance of Commercial Papers (CPs) and by way of unsecured long term loans from their promoters and directors. The borrowing by way of issuance of CPs shall be subject to compliance with relevant RBI Guidelines. The borrowing by way of unsecured long term loans from the promoters and directors shall be subject to the compliance with appropriate provisions of Companies Act, 2013. A stock broker shall not be permitted to borrow funds from any other source, other than the sources stated above," said SEBI.
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According to the Securities and Exchange Board of India (Sebi), the circular would be effective starting on December 30.
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