SEBI’s Latest MTF Margin Rules Review: What Traders Should Know

The Securities and Exchange Board of India (SEBI) has announced a comprehensive review of its margin-trading funding (MTF) framework, a move that will likely reshape how traders and brokers approach leveraged stock purchases in India. According to its 2024–25 annual report, SEBI stated that a “comprehensive review exercise is being undertaken with respect to the currently applicable margining framework.” For traders using margin financing, understanding what’s at stake is crucial, from collateral eligibility to broker obligations and risk controls.

What is Margin Trading (MTF) and Why the Review

Understanding MTF

Under an MTF, an investor pays part of the purchase cost of a security and borrows the remaining amount via their broker, using either cash or existing securities as collateral. SEBI-registered brokers facilitate this funding, subject to margin requirements and approved stocks.

Why SEBI is Reviewing the Framework

The regulator’s concerns centre around risk management, especially at clearing corporations and the broader systemic risk if many leveraged positions go awry. For instance:

• SEBI plans to review the margining framework and the list of securities eligible under MTF.

• Clearing corporations’ exposure via brokers and clients may need stronger safeguards.

• The review aligns with SEBI’s broader regulatory agenda (including angel funds, REITs/InvITs, and mutual funds) to ensure frameworks stay relevant.

The objective is not to restrict MTF but to ensure that leverage does not amplify losses and that collateral and margin rules are robust.

Key Changes and What They Mean for Traders

Easier Use of Cash Collateral

In September 2024, SEBI allowed securities funded through cash collateral to count as maintenance margin under MTF (subject to conditions, especially for “Group 1” securities). For traders, this opens up collateral flexibility: existing cash/traded securities may be more easily deployed to support margin obligations.

Review of Eligible Securities

SEBI is actively reviewing which scrips may remain eligible for MTF. While rumours circulated of 1,010 stocks being removed from the list, the exchanges clarified that no such mass removal was effected at that time. That said, the list remains dynamic and subject to change based on impact cost, liquidity, and risk metrics.

Enhanced Broker & Clearing Obligations

Brokers must ensure margin collection, avoid mixing collaterals (funded stocks vs pledged securities), and report exposures promptly. For traders, this means better transparency, but possibly stricter compliance margin calls could be more frequent or immediate.

Also Read: Margin Pledge vs MTF Pledge

Risk Management Focus

The review emphasizes monitoring of leverage, stress testing of portfolios, and systematic risk at the clearing-corporation level. Traders should expect tighter monitoring and possibly higher margin requirements or restricted access for certain high-risk stocks or portfolios.

Implications for Traders: Practical Takeaways

• Examine your broker’s MTF offering: Confirm what collateral is accepted, how margin is calculated, and what triggers a margin call.
  

• Check the stock’s eligibility: Before relying on MTF, ensure the underlying stock is approved for margin funding and remains so in future review cycles.

• Be prepared for margin calls: With SEBI’s focus on risk management, brokers may act swiftly to square off positions if margin ratios breach thresholds.

• Use leverage judiciously: Leverage amplifies both gains and losses. The changed framework underlines that leveraged trades are no longer low-hassle.

• Monitor your collateral composition: If you use securities as collateral, note that funded stocks and pledged shares must be separately tracked, so mixing may complicate your risk profile.

• Stay updated on new rules: Because the review is ongoing and further changes may follow, keeping an eye on broker circulars, SEBI releases, and exchange notices is prudent.

Conclusion

For traders operating via margin trading facility schemes, the forthcoming changes by SEBI signal a shift toward more disciplined, transparent, and risk-aware operations in leveraged equity investing. While the review may introduce tighter controls and potentially higher margins, it also brings clarity and safeguards that can benefit disciplined investors. Successful MTF usage will hinge on being informed, prepared, and aligned with the evolving regulatory ecosystem.