ETF: Sebi probably acquiesces to margin trading

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By Ashley Coutinho

The Securities and Exchange Board of India (Sebi) plans to allow brokers to extend the Margin Trading Facility (MTF) to Exchange Traded Funds (ETFs).

MTF, also known as eMargin, helps overcome the problem of insufficient funding when placing delivery transactions. The margin requirement is typically 25-75% depending on a stock’s volume and liquidity, which involves up to four times leverage. The broker funds the margin, which can be settled later when the position is settled.

Currently, only certain stocks belonging to group 1 are offered the MTF facility by brokers. Globally, however, ETFs can be purchased on margin, even for intraday trading.

“The regulator can authorize MTFs on ETFs. This is in line with global best practice and will allow investors to take leveraged bets on benchmarks and sector indices,” a person familiar with the matter said.

Also Read: HDFC Silver ETF: Latest New Fund Offering (NFO) Date, Benefits, Risks and Other Details You Need to Know

Margin trading rules on ETFs are likely to be similar to those for other stocks. It is unclear whether Sebi would allow MTF on all sector indices. An email sent to Sebi did not immediately receive a response.

Equity ETFs are passive index-based investment instruments and investments are made in securities in the same proportion as in the underlying index.

Suppose an investor is bullish on the Nifty50 index after a sharp market correction and wants to bet on the direction of the market with capital of `1 lakh. He can take a `1 lakh position in the Nifty50 ETF with `3 lakh funded by the broker via the MTF route. The transaction is done in the cash segment but with leverage.

Likewise, investors who wish to bet on, for example, the IT index instead of a few select names such as Infosys or TCS can purchase an IT ETF in the form of leverage. This can be particularly useful for sectors that have marginal dispersion of returns and where there is no distinct advantage to choosing one security over another.

“If you allow equities, there is no reason not to also allow ETFs under MTFs. Today, the only way for investors to profit from an index is through futures and options. Allowing ETFs under MTF will provide a cost-effective way to leverage the index,” said a senior industry official.

For example, investors today can buy a lot of Nifty futures contracts to bet on the index. Given current margin requirements of around 12.3%, investors would have to shell out `1,09,212 for this, implying around eight times leverage. The downside here is that an investor cannot bet on the index with amounts below 50,000 or 75,000.

“ETFs in India are in their infancy and the introduction of ETF MTFs will be a game changer as it will help increase the liquidity of these instruments by allowing large institutional and retail investors to take leveraged bets at lower risk and lower cost,” said Lav Chaturvedi, Executive Director and CEO of Reliance Securities.

Assets under management (AUM) for ETFs surpassed the 5 trillion mark earlier this year, thanks to record inflows of 1.280 billion in 2021-22.

The asset base of all ETFs and index funds following Nifty50 in India exceeded $2 trillion this year. Nifty50 indexed passive funds account for 40% of ETF and index fund assets under management in India.

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