Margin Trading Facility (MTF) is a service provided by brokers where you can borrow money to buy more stocks. Here, you only pay a part of the total amount, known as the margin, and the broker lends you the rest. This service can help you increase your profits but remember, losses can be larger too.
Ex: You have ₹ 50,000 in your trading account, Alice Blue provides 4x MTF Margin i.e. (₹ 50,000 x 4 = ₹ 2,00,000)
With Alice Blue MTF you can now buy stocks worth ₹ 2,00,000!
This article covers:
- What Is Margin Trading Facility?
- Margin Trading Facility Terms & Conditions
- Margin Trading Facility Example
- Liquidation of the position under MTF
- MTF Interest Rates
- Eligibility For Margin Trading Facility
- Features Of Margin Trading
- What Are The Benefits Of Margin Trading Facility?
- Risks Involved in Margin Trading Facility
- Margin Trading Facility Sebi Regulations
- How To Activate The Margin Trading Facility In Alice Blue?
- Margin Trading Facility – Quick Summary
- Margin Trading Facility – Frequently Asked Questions
What Is Margin Trading Facility?
Margin Trading Facility (MTF) allows traders to amplify their purchasing power in the stock market by financing only a certain percentage of the total transaction value, known as the margin. This enables them to take leveraged positions and increase their buying capacity for shares and securities. The margin can be provided in either cash or shares used as collateral.
SEBI closely regulates MTF. SEBI and the exchanges determine the eligible securities and margin requirements. Investors who wish to avail themselves of MTF must agree to additional terms and conditions to ensure they understand the risks involved.
Margin Trading Facility Terms & Conditions
Here are the new terms and condition of MTF,
- The Leveraged position can be carry-forward up to 365 days.
- The Initial Margin amount can be only in the form of Cash.
- Only POA/DDPI Clients are eligible to get the MTF facility.
Margin Trading Facility Example
Picture this: you deposit ₹1,00,000 in your Alice Blue trading account. Now, Alice Blue has this remarkable offering called the 4x Margin Trading Facility (MTF). This means your initial deposit can be effectively quadrupled for trading purposes, taking your trading capacity from ₹1,00,000 to a substantial ₹4,00,000.
But, the potential doesn’t stop there! Alice Blue’s MTF pushes the envelope further with a minimal charge of 0.049% per day for 365 days. In a nutshell, your initial deposit empowers you to trade with a significantly larger amount, broadening your scope for profits. It’s about maximizing your investment and expanding your opportunities with Alice Blue!
The interest rate applied to the borrowed amount in the Margin Trading Facility (MTF) is 0.049% per day, which is equal to a yearly interest rate of 18%. This interest rate is charged on the funds borrowed from the broker.
Liquidation of the position under MTF
This policy brief details Aliceblue’s protocols for addressing Mark to Market losses, margin requirements, and the management of securities for the clients.
- If the client is not made good the Mark to Market (M2M) losses or margin short fall within 2 working days from the date of margin call, position will be squared off to the extend of the M2M losses or margin call with the discretion of the stockbroker.
- If the securities are moved out of approved securities list by Alice blue and or Group 1 securities list provided by exchange / SEBI, client is expected to clear the debit and take delivery to his demat account immediately. Otherwise, position will be squared off by Aliceblue without further any intimation.
- In case if the client is not fulfilled the Mark to Market (M2M) losses and or Margin shortfall and the same reaches 80 % and the client is not made on the Mark to Market losses and or margin shortfall, MTF Funded stock will be squared off immediately. Even after the square off the funded stock, there is shortfall in margin or debit in the trading account, collateral securities pledged towards margin also will be squared off and set off the losses occurred on the trading account of the client.
- If the securities are purchased in the market and the said securities are not received from the exchange or due to internal matching and the auction / Closed Out rates are provided by the exchange or as per policy.
- If the securities are purchased in the market and the said securities are not received from the exchange or due to internal matching and the auction / Closed Out rates are provided by the exchange or as per policy, then the said MTF position will be liquidated and the necessary credits are passed on to the client account.
MTF Interest Rates
The interest payable is typically calculated based on the duration for which the funds are borrowed, multiplying the agreed interest rate by the principal amount and the proportional time period. Review the specific rules and regulations your broker sets, as they may have their guidelines for the margin trading facility and interest calculations.
Eligibility For Margin Trading Facility
Here are the key factors that determine eligibility for margin trading:
- To utilize the Margin Trading Facility, it is necessary to have a margin account with a broker. This account is designed explicitly for margin trading and allows you to borrow funds to trade on margin.
- Every margin account needs to be funded. The broker will specify a minimum maintenance margin level that must always be maintained. The broker may deny further margin positions if the margin level falls below the maintenance margin.
- Margin trading is usually permitted only in stocks with sufficient liquidity and trading volumes. SEBI has defined a master list of eligible stocks for margin trading. However, brokers may further restrict the list to highly liquid stocks for risk management.
- It is essential to maintain the minimum balance in your margin account. Positions are typically squared off at the end of each trading session, and inadequate margins can result in forced closure of positions.
Features Of Margin Trading
The main feature of margin trading is that it enables investors to amplify their buying power by borrowing funds from their broker. This allows them to purchase securities with a smaller upfront investment than fully paying them in cash.
Other features of margin trading are given below:
- Authorized Brokers
Margin trading accounts can only be offered by authorized brokers who comply with the regulations set by SEBI. These brokers have the necessary infrastructure and approvals to offer margin trading services to their clients. Alice Blue offers a 4x margin via MTF.
- Pre-defined Securities
The securities eligible for margin trading are predetermined by SEBI and respective stock exchanges. SEBI maintains a list of eligible stocks for margin trading, ensuring that only specific securities can be traded on margin.
- Margin Requirements
Margin trading involves maintaining a certain margin level specified by the broker and regulatory authorities. This ensures that investors have sufficient funds or collateral in their margin account to cover potential losses and maintain the required margin levels.
What Are The Benefits Of Margin Trading Facility?
One of the primary benefits of margin trading is the ability to leverage your buying power. With MTF, investors can trade and hold equity cash delivery positions by maintaining margin in stocks or cash. This allows them to control a larger position than what their available cash balance would permit, potentially increasing their returns.
Other benefits of the margin trading facility are given below:
- Margin trading with Alice blue allows investors to leverage up to 4 times their available funds. This means they can trade with a higher amount than the cash or securities they have in their account, enabling them to take larger positions in the market.
- Margin trading allows for a longer holding period compared to regular cash trading. Investors can hold their positions for an extended period, which can be advantageous when anticipating long-term price movements or waiting for favorable market conditions.
- Margin trading limits are fungible and can be utilized across all market segments. This flexibility allows investors to allocate their margin funds to various stocks and securities, helping them benefit from multiple investment opportunities.
Risks Involved in Margin Trading Facility
One of the inherent risks of margin trading is that it amplifies gains and losses. While leveraging allows investors to take larger positions with a smaller amount, it also means that losses are magnified proportionately. If the market moves unfavorably to the investor’s position, the losses incurred can exceed the initial investment, leading to significant financial losses.
Other risks involved in MTF are given below:
- When using MTF, investors must maintain a minimum margin balance in their trading account.
- Suppose the investor is unable to fulfill the margin call. In that case, the broker may liquidate some or all of the investor’s positions to recover the borrowed funds, potentially resulting in losses for the investor.
Margin Trading Facility SEBI Regulations
Margin Trading Facility (MTF) in India is regulated by the SEBI, the regulatory body for the securities market. SEBI has implemented regulations to govern margin trading and ensure investor protection. Here are some key SEBI regulations related to margin trading:
- Traders must have a margin account with an authorized broker to avail of the margin trading facility.
- SEBI has defined the minimum margin requirements for margin trading. The upfront margin requirement specifies the percentage of the total trade value traders must deposit to initiate a margin trade.
- SEBI has significantly changed margin regulations to address risk and promote investor protection. These changes include increasing the upfront margin requirement from 25% to 50% from March 1, 2021, with plans to further raise it to 75% and 100% in subsequent phases. These changes aim to reduce excessive leverage and ensure adequate margin coverage.
- Brokers and traders must comply with SEBI regulations regarding margin trading. SEBI has the authority to take enforcement actions against non-compliance, including imposing penalties, suspending, or canceling trading licenses.
How To Activate The Margin Trading Facility In Alice Blue?
To activate the Margin Trading Facility (MTF) with Alice Blue, you can follow these steps:
- Visit the Alice Blue website, Click on “Backoffice BOT” from the drop-down menu and log in using your credentials.
- Once logged in, navigate to the “Profile” section. Then select “Margin Trading” from the drop-down menu.
- Look for the option or tab labeled “MTF” and click on it. This will take you to the MTF activation page.
- On the MTF activation page, carefully review the terms and conditions associated with the Margin Trading Facility. Accept the acknowledgment by ticking the checkbox or following the provided instructions if you agree.
- After accepting the terms and conditions, submit your MTF activation request by clicking the appropriate button.
- Once the request is submitted, the activation process will begin.
Please note that in order to activate MTF (Margin Trading Facility) trading, you must have POA (Power of Attorney) and DDPI (Depository Participant Instruction) enabled in your trading accounts.
To learn How to Activate the DDPI, click here.
Margin Trading Facility – Quick Summary
- Margin Trading Facility (MTF) allows investors to buy securities using borrowed funds, leveraging their trading positions.
- Investors can amplify their purchasing power by paying only a percentage of the total transaction value, known as the margin.
- SEBI regulates MTF, and SEBI and the exchanges determine eligible securities and margin requirements.
- The interest rate applied to the borrowed amount in the Margin Trading Facility (MTF) is 0.049% per day, equal to the yearly interest rate of 18%.
- Margin trading accounts must be opened with authorized brokers and require maintaining a minimum margin level.
- Margin trading at Alice Blue allows investors to leverage up to 4 times their available funds.
- Margin trading enables investors to trade with more funds than they possess but also magnifies gains and losses.
- SEBI has regulations to govern margin trading, including minimum margin requirements and changes to promote risk management and investor protection.
- To activate the MTF facility in Alice Blue, login to the BOT application, click “My Requests,” then select “MTF,” read and accept the terms & conditions, and submit the request.
- The activation process for MTF with Alice Blue may take up to 24 hours, and the status can be checked on the same page where the request was submitted.
Margin Trading Facility – Frequently Asked Questions
1. What is MTF in India?
Margin Trading Facility (MTF) in the market terminology refers to a special advantage extended to purchasers of stocks and securities, enabling them to acquire assets worth more than their available cash by paying a small fraction of the total value upfront.
2. What is the full form of MTF in trading?
The full form of MTF in trading is a “Margin Trading Facility.”
3. What is the MTF position?
MTF position refers to the leveraged position created by an investor using the Margin Trading Facility (MTF). When an investor avails the MTF, they can take a position in securities by providing a margin amount, in the form of cash.
4. What are the benefits of MTF?
MTFs provide transparency both before and after a trade. This is possible because users can always see the available volume at various price levels, allowing them to identify the most favorable price before executing an order.
5. What is the maximum limit for MTF?
The applicable limit under MTF is set at a maximum of ₹25,00,000. This means that the total amount an investor can avail through MTF should not exceed ₹25,00,000 at any given time.
6. What are MTF rules?
According to regulatory guidelines, it is compulsory to pledge MTF positions on the CDSL website by 7 PM on the same day.You will receive an email from CDSL regarding the pledge process. Please click on the provided URL and enter the OTP to complete the pledge. It is important to complete the pledge within the given timeframe. Failure to do so will result in the position being considered as a normal “CNC” (Cash and Carry) position.
If the position remains uncleared by the T+6 days deadline, the RMS (Risk Management System) will automatically square off the position. It is crucial to clear any debit balance associated with the position before this deadline.
In case of a debit balance, interest charges will be applicable at a rate of 24% per annum. It is advised to settle the debit balance promptly to avoid further charges.
Please ensure timely completion of the pledge process and clear any debit balance to comply with the required procedures and avoid any unnecessary charges or consequences.
7. What is penalty for margin trading?
Penalty for margin trading refers to a fee imposed when insufficient margin exists in a trading account. Exchanges mandate clients to keep sufficient margins for their trades and to deposit additional funds in case of a margin shortfall.
8. Is MTF trading legal in India?
The Securities and Exchange Board of India (SEBI), the regulatory authority for capital markets, has granted permission for brokers to offer margin trading facility (MTF) for equity exchange-traded funds (ETFs).
