Exchange-Traded Fund (ETFs): SEBI May Give Approval For Margin Trading

Currently Group 1 securities stocks are offered at the MTF facility. ETFs can be purchased on margin & intra-day trades. SEBI nod likely for margin trading of ETFs.

Brokers will be permitted to add equities exchange traded funds to the margin trading facility (MTF) by the Securities and Exchange Board of India (SEBI) (ETFs).

When placing delivery trades, MTF, also known as eMargin, aids in overcoming the issue of insufficient funds. 

The typical margin requirement ranges from 25-75%, depending on the volume and liquidity of a stock, meaning up to four times the leverage. 

The margin is funded by the broker and can be settled once the situation is squared off.

The MTF facility is currently only made available by brokers for a limited number of stocks that qualify as Group 1 securities. However, ETFs can be bought on margin all across the world, even for intraday trading.

MTF on ETFs may be permitted by the regulator. According to a person with knowledge of the situation, this is consistent with international best practices and will enable investors to make leveraged bets on the benchmarks and sectoral indexes.

The regulations governing margin trading on ETFs are probably comparable to those governing conventional stocks. If SEBI will permit MTF on all sectoral indices is unclear. SEBI did not respond to an email sent to them right away.

Equity ETFs are passive investment vehicles based on indexes that invest in securities in a similar manner to the underlying index.

After a significant market correction, let’s say that an investor is optimistic on the Nifty50 index and wishes to place a $15,000 bet on the market’s path. He can use the MTF approach to take a ‘1 lakh stake on the Nifty50 ETF with ‘3 lakh funded by the broker. Although leveraged, the transaction is conducted in the cash category.

Similar to this, investors can purchase an IT ETF in a leveraged form if they prefer to wager on, say, the IT index rather than a few handpicked companies like Infosys or TCS. 

When picking a stock over another in a sector with little return dispersion and no clear advantage, this can be especially helpful.

“There is no reason why ETFs under MTF shouldn’t be allowed if stocks are. Today, futures and options are the only ways for investors to leverage on an index. 

An efficient solution to leverage the index will be provided by allowing ETFs under MTF, according to a senior industry executive.

For instance, investors can now wager on the index by purchasing one lot of Nifty futures. Investors will need to pay 1,09,212 for this given the existing margin requirements of roughly 12.3%, which indicates a leverage of about 8 times. 

The drawback is that an investor can’t wager on the index with sums as low as $50,000 or $75,000 in this case.

According to Lav Chaturvedi, executive director and CEO of Reliance Securities, 

“ETFs in India are at a nascent stage and the introduction of 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.”

Early this year, ETF assets under management (AUMs) surpassed the $5 trillion mark, thanks to record inflows of $1.28 trillion between 2021 and 2022.

This year, the combined asset base of all ETFs plus index funds in India that track the Nifty50 exceeded $2 trillion. 40% of India’s ETF and index fund AUM is made up of passive funds tied to the Nifty50 index.