ETFs: Sebi nod likely for margin trading
August 22, 2022
At present, only select stocks that fall under Group 1 securities are offered the MTF facility by brokers. Globally, however, ETFs can be purchased on margin, even for intra-day trades.
The Securities and Exchange Board of India (Sebi) plans to allow brokers to extend the margin trading facility (MTF) to equity exchange traded funds (ETFs).
MTF, also referred to as eMargin, helps overcome the problem of insufficient funding when placing delivery trades. The margin requirement is usually 25-75% depending on a stock’s volume and liquidity, implying a leverage of up to four times. The broker funds the margin, which can be settled later when the position is squared off.
At present, only select stocks that fall under Group 1 securities are offered the MTF facility by brokers. Globally, however, ETFs can be purchased on margin, even for intra-day trades.
“The regulator may allow MTF on ETFs. This is in line with global best practices and will allow investors to take leveraged bets on the benchmark and sectoral indices,” a person familiar with the matter said.
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The rules for margin trading on ETFs are likely to be similar to those for other stocks. It is not clear if Sebi would allow MTF on all sectoral indices. An email sent to Sebi did not immediately get a response.
Equity ETFs are passive investment instruments that are based on indices and the investments are made in securities in the same proportion as in the underlying index.
Let’s assume that an investor is bullish on the Nifty50 index after a steep correction in the market and wants to bet on the market direction with a capital of `1 lakh. He can take a `1 lakh position on the Nifty50 ETF with `3 lakh funded by the broker through the MTF route. The transaction is done in the cash segment but is leveraged.
Similarly, investors who want to bet on, say, the IT index instead of a few select names such as Infosys or TCS can buy an IT ETF in a leveraged form. This can be particularly useful for sectors that have marginal dispersion in returns and where there’s no distinct advantage of picking one stock over the others.
“If you are allowing stocks, there is no reason not to allow ETFs under MTF as well. Today, the only way for investors to leverage on an index is through futures and options. Allowing ETFs under MTF will offer a cost-effective way to leverage the index,” a senior industry official said.
For instance, investors today can buy one lot of Nifty futures to bet on the index. Given the current margin requirements of about 12.3%, investors will have to shell out `1,09,212 for this, implying a leverage of about eight times. The disadvantage here is that an investor cannot bet on the index with smaller amounts of `50,000 or `75,000.
“ETFs in India are at a nascent stage and introducing MTF on ETFs will be a game-changer as it will help boost liquidity in these instruments by allowing larger institutional, as well as retail investors to take leveraged bets at lower risk and a low cost,” Lav Chaturvedi, executive director and CEO, Reliance Securities, said.
Assets under management (AUMs) of ETFs surged past the `5-trillion mark earlier this year, on the back of record inflows of `1.28 trillion in 2021-22.
The asset base of all the ETFs and index funds tracking Nifty50 in India crossed `2 trillion this year. Nifty50 index-linked passive funds account for 40% share of ETFs’ and index funds’ AUM in India.
[The Financial Express]
