SEBON issues directive on margin trading

Kathmandu, November 6

Securities Board of Nepal (SEBON) has issued a directive on margin trading, paving way for the investors that obtain loans from the brokerage firms to purchase stocks from the secondary market.

The facility of margin trading will come into force once the Stock Brokers’ Association of Nepal and Nepal Stock Exchange (Nepse) prepare and issue the guidelines on margin trading based on the directive of securities market regulator.

As per the directive issued by SEBON, brokerage firms can extend the margin trading facility to investors for transaction of stocks of the listed companies with positive net worth and at least 10,000 shareholders. Also,  the firm must have distributed no less than 10 per cent dividend every annum.

The brokerage firm wishing to extend margin trading facility to their clients must have net worth of Rs 50 million. Value of the stocks should be calculated on the basis of 180 days’ average or current market price of stock, whichever is lower, while extending loans and the brokerage firms have to take 50 per cent of the value as initial margin.

SEBON has also fixed the maintenance margin for brokerage firms. They can charge 40 per cent as maintenance margin from the clients during the period of margin trading facility based on the market trend and risks. This means that 40 per cent of the market value of the stocks should be maintained in margin accounts. Maintenance margin is the minimum amount of equity that must be maintained in a margin account.

The directive has extended right to the brokerage firms to sell the stocks if the client fails to pay the fees accrued as maintenance margin. Brokerage firms can extend margin trading facility from their own source or by mobilising the loan facility of the banks and financial institutions (BFIs).

As per the provision of the directive, brokerage firms can extend margin trading facility up to two times their certified net worth. However, members from one family should not have obtained margin trading facility of more than 10 per cent of the net worth of the concerned brokerage firm.

Brokerage firms have to clearly negotiate with the clients and sign agreement with them regarding initial margin, maintenance margin, margin call, service fees, and share purchase, among others. And broker firms must maintain separate records of each client obtaining margin facility and submit the audit report to the Accounts Board and securities market regulator.

Though the SEBON has extended facility of margin trading, the facility of margin lending from the banks and financial institutions under the regulation of the Nepal Rastra Bank will continue. The securities market regulator has expected that the margin trading will facilitate the investors in share trading and increase the liquidity in the secondary market.