Market Updates: Capital markets regulator, Securities and Exchange Board of India (Sebi) has permitted brokers to extend the margin trading facility (MTF) to equity exchange-traded funds (ETFs) and such funds can be used as collateral as well. At present,  only select stocks that come under Group 1 securities are offered the margin trading facility by brokers.

''Considering the emergence of ETFs as an investment product with various advantages such as transparency, diversification, lower cost, etc, it has been determined to permit units of equity exchange-traded funds as an eligible security for MTF as well as an eligible collateral under MTF,'' the regulator said in a circular.

The facility is executed with borrowed funds or securities that enabalingenablings to take exposure in the market over and above their resources.
Sebi said, the client's initial margin payment to the stock broker shall be made in cash, cash equivalents, or equity ETFs.
Also, 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,  Sebi said.

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.

The circular will come into effect from December 30, the Securities Sebi said.

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