Sebi mulls MTF rule revamp, dynamic price bands to boost market activity

Market regulator weighs expanding collateral norms, easing operations, and introducing dynamic price bands to enhance liquidity and strengthen market infrastructure

The Securities and Exchange Board of India (Sebi) is considering an overhaul of the margin trading facility (MTF) norms, providing more flexibility and operational relaxations, according to multiple sources. 

The market regulator is also discussing implementing dynamic price bands across exchanges, they added. 

Sebi’s Secondary Market Advisory Committee (SMAC), tasked with improvement in market infrastructure and transparency, held discussions last week on several reforms for the ecosystem. The decision on changes to the MTF framework was taken in the meeting, the sources said. MTF allows investors to pay only a portion of the trade value upfront, with brokers funding the rest at an interest cost. 

The market regulator has discussed expanding the eligible collateral for MTF and increasing the net-worth requirement for brokers to offer MTF services. 

In its bid to expand the eligible collateral, the regulator may include government securities, mutual funds, exchange-traded funds (ETFs), and units of real estate investment trusts (Reits) and Infrastructure Investment Trusts (InvITs). 

“The regulator is mulling to expand the MTF market. With the proposed changes, one would be able to continue to invest in only group 1 securities in MTF but as far as collateral is concerned, one would be able to expand it from group 1 to ETFs, mutual funds, and NCDs (non-convertible debentures),” said a person familiar with the developments. 

The regulator has also discussed operational measures to smoothen the process of pledging and usage of liquid assets — a process which experts say is cumbersome at present. 

 

“In loan against securities, one can pledge securities and take a loan on it for any purpose. In this case, one will be able to pledge the liquid securities and get the limits on them to invest only in MTF,” explained an industry player. 

Flexibilities to the MTF framework will help expand the volumes in the cash segment. With the increase in leverage opportunities for the customer, the cash volume will also expand, the industry player said.  

The discussions come at a time when markets have seen increased volatility. MTF book too has seen moderation over the last two months. Prior to this, for the last seven months, the MTF book had continued to be above ₹1 trillion as brokerage houses continued to expand the new revenue stream. 

The sources said that stock brokers had submitted a slew of suggestions on reforms for MTF to make it more operational-friendly at a time when revenue streams have been narrowed. 

A detailed circular on the expanding collateral is expected soon. 

An emailed query sent to Sebi remained unanswered until press time. 

Further, the minimum net-worth requirement for stock brokers to offer MTF may also be increased from ₹3 crore to ₹5 crore.

Other key discussions by the regulator were on measures to curb abnormality in option pricing through dynamic narrow price bands, and better volatility controls. 

“Dynamic pricing is already implemented on the NSE and the market regulator wants other exchanges, including commodities, to implement it. There have been system-related issues observed at some MII (market infrastructure institution) level, which needs to be made robust and this system could be replicated easily,” said another source. 

Under the framework, price bands may be adjusted and be kept flexible, depending on market conditions and volatility.