Stockbrokers allowed to provide margin trading facility

Published On: November 7, 2017 05:45 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, Nov 7: Securities Board of Nepal (Sebon) has paved the way for stock brokerage firms to provide margin trading services to their clients.

Releasing the 'Directives Related to Margin Trading Service, 2017' on Monday, Sebon -- the apex regulatory body of securities market -- said that the new facility will help to increase liquidity in the market, make it easier for investors to trade shares and expand the scope of business for brokerage firms.

So far, stock brokerage firms are allowed only to execute trading orders placed by their clients in the secondary market. 

The new guidelines broadly outline the requirements for brokerage firms for providing such margin trading service, ceiling of amount that a brokerage firm can provide in margin trading and the minimum initial margin that a brokerage firm should collect from the client, among other rules. However, only the brokerage firms having net worth of at least Rs 50 million can provide such facility, according to the guideline.

Once brokerage firms start providing margin trading services, stock investors no longer have to depend on only the bank and financial institutions (BFIs) to get loans for buying shares in the secondary market. Before starting such facility, brokerage firms must prepare their own working procedure for provide such service and get it approved from the Nepal Stock Exchange -- the frontline regulator of brokerage firms.  

Brokers say that they will be able to provide such services immediately once the Nepse develops the system in its trading platform to identify transactions that have been carried out under margin trading. “Since we are required to manage a separate record of transactions carried out under our margin trading services, Nepse should add a feature in its trading system for identifying such transactions,” Priya Raj Regmi, president of the Stock Brokers' Association of Nepal (SBAN), told Republica. “It won't take much time to preparing the working procedure as we have a uniform type of draft for all brokerage firms.”
Investors can use margin trading facility to buy shares of only the companies which have at least 10,000 shareholders and have provided at least 10 percent dividend to their shareholders in last two fiscal years, according to the Sebon's guidelines. The brokerage firm should collect 50 percent in initial margin of the amount of average share price of 180 days or market price of the listed company, whichever is lower, from the client to provide margin trading facility.

The minimum maintenance margin requirement, or the minimum amount of securities that must be maintained in a margin account, has been set at 40 percent, and broker can sell the shares in the margin account if the investor fails to make payment as required for the maintenance margin. 

Brokerage firms are free to set service charge, or interest rates, in the margin trading. However, the initial margin, maintenance margin, margin call, service charge and other terms and conditions should be clearly stated in the contract with the client, according to the guidelines. 

Amid concerns about the new facility provided to brokerage firms to provide margin financing like BFIs without Nepal Rastra Bank's direct regulation, senior officials of the Nepal Rastra Bank (NRB) say that the new practice would instead make it easier for them to monitor credit expansion in the stock market. 

“As margin trading services will be made available from brokerage firms through BFIs, it will be easier to monitor the credit going toward the stock market compared to individual borrowers in the market,” Nara Bahadur Thapa, the chief of Research Department at the NRB, said. “The central bank does not intervene into the matter until it starts seeing impacts of the new facility in macroeconomic, banking and external sector stabilities.”

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