Securities Board of Nepal Issues New Directive to Regulate Margin Trading in Capital Market

Kathmandu. The Securities Board of Nepal (SEBON) has issued the 'Margin Trading Facility Directive, 2082' with the objective of making the system of buying and selling shares using borrowed funds in the capital market systematic, transparent, and risk-controlled.

The new directive clarifies and brings forth regulations covering aspects such as the eligibility, capital, and net worth limits for securities brokers eligible to provide margin trading facilities, the rates for initial and maintenance margins, the process for margin calls and share sales, clearing arrangements, sources of loans, the maximum limit allowed per client, account operation, and information flow.

According to the Board, this directive, effective from Falgun 1, 2082, specifies the eligibility criteria for brokers providing margin trading facilities. As per the directive, a broker company wishing to offer margin trading facilities must maintain a minimum paid-up capital of NPR 200 million.

Furthermore, the company must be a clearing member. Additionally, if the main company holds depository participant membership or is a shareholder of a depository participant company, or is a subsidiary, the main company must have obtained depository membership. This is expected to strengthen risk management by directly linking margin trading with technical, legal, and clearing infrastructure.

Before providing margin facility, the broker must submit an application for approval to the securities market along with audited financial statements. After studying the application, approval will be granted, and the Board will be informed. However, brokers who have already obtained approval before the directive comes into effect do not need to reapply for approval, but they must submit documentation proving they meet the eligibility criteria as per the directive within one month.

When providing margin facility on shares of listed organized institutions, the broker must collect a minimum of 30 percent of the market price as initial margin from the investor. Shares purchased under margin and client details must be recorded separately. Valuation must be done daily on a 'Marked-to-Market' basis, but additional facility cannot be provided based on price increases.

As per the directive, the broker can demand a margin exceeding 30 percent based on the client's risk assessment, market conditions, and the risk associated with the respective share. Additionally, a minimum maintenance margin of 20 percent must be maintained throughout the facility period. This is expected to mitigate debt-based risk when the market declines.

Moreover, according to the directive, the responsibility to maintain the maintenance margin when the market price falls lies with the investor. If this is not maintained, the broker must issue a 'margin call'. If the required amount is still not received after the margin call, the broker can sell the shares purchased under margin. This procedure must be clearly stated in the broker's operating procedures.

After the share sale, the broker must settle the account with the client and inform the securities market about it. However, if the investor fails to maintain the maintenance margin, the broker can accept 'A', 'B', and 'G' category listed shares as collateral, whose value will only be considered 60 percent of the market price. If the maintenance margin is maintained later, such collateral shares must be released.

Brokers can provide margin facility using their own funds, loans taken from banks and financial institutions, and unsecured loans taken from shareholders or directors. However, prevailing company laws must be followed when taking unsecured loans. The total amount of loans from banks and financial institutions and unsecured loans cannot exceed four and a half times the broker's net worth.

Furthermore, a clear provision has been made that cash or shares of any one client cannot be used to provide margin facility to other clients, which is expected to prevent the risk of client asset misappropriation.

Brokers can provide margin facility up to five times their certified net worth. However, no single client, their household members, or affiliated entities can be provided with more than 10 percent of the total margin facility.

Shares purchased under margin must be clearly identified during daily trading or clearing. Investors must open separate 'Margin Trading Account' and 'Margin Trading Demat Account'. For clearing purposes, the broker (clearing member) must open a separate margin clearing beneficiary account with the Central Depository Company.

As per the directive, the investor's margin Demat account must be linked to the margin account opened through the broker and the clearing member's account. The broker can obtain an authorized power of attorney for account operation when necessary, but this authority can only be used for the purpose of share sale and clearing. Details of usage must be informed to the securities market. However, if margin facility can be provided without opening a separate account through the broker's system, the provision for a separate account being mandatory is also included in the directive.

The maximum duration for margin trading facility will be one year. It can be renewed after the period expires. The broker must provide details of purchases made under margin to the securities market on the following day of the transaction and submit a monthly report to the Board at the end of every month. The securities market can develop necessary electronic mechanisms to collect the details.

Thus, the new directive brings margin trading into a formal, disciplined, and capital-based framework. The provisions such as a minimum initial margin of 30 percent and a maintenance margin of 20 percent, limits based on net worth, the provision not to take loans exceeding 4.5 times, and the 10 percent limit per client are expected to help control market volatility caused by excessive leverage and artificial demand creation.