Brokers Seek Approval to Borrow from High-Net-Worth Individuals for Margin Trading

Stockbrokers have urged the Securities Board of Nepal (SEBON) to allow them to borrow unsecured funds from high-net-worth individuals and institutions to provide margin trading facilities, arguing that broader funding sources would help expand market activity.

Submitting suggestions on the proposed Margin Trading Directive, 2025, the Stock Brokers’ Association of Nepal (SBAN) proposed that brokers be allowed to provide margin trading services using funds sourced not only from their own capital, banks and financial institutions, and shareholders or directors, but also from high-net-worth individuals and institutions without collateral.

Margin trading allows investors to purchase securities using loans provided by brokers.

SEBON had made public the draft of the new Margin Trading Directive last month, seeking feedback from stakeholders. The regulator plans to replace the existing Margin Trading Directive, 2017 with the new framework. The draft directive currently proposes brokers to mobilise funds only from their own resources, bank loans, or loans from shareholders and directors.

In its submission, the brokers’ association proposed that funds mobilised from multiple sources should not exceed five times a broker’s net worth, compared to SEBON’s proposed ceiling of 4.5 times net worth.

The association also suggested that other loans taken by brokers from banks and financial institutions under prevailing laws—unrelated to margin trading—should not be counted as margin trading borrowings.

If banks and financial institutions require collateral for loans taken to fund margin trading, brokers should be allowed to pledge securities held in clients’ margin trading beneficiary accounts, without freezing the shares, the association said.

SBAN has also proposed that brokers be allowed to provide margin trading facilities up to 10 times their certified net worth, double the five-times limit proposed by SEBON.

Regarding exposure limits, brokers have suggested that margin trading facilities for a single client and their immediate family members be capped at 25 percent of the broker’s net worth or Rs 100 million, whichever is lower. SEBON’s draft limits such exposure to 20 percent of net worth.

On margin calls, SEBON has proposed that brokers issue a margin call if clients fail to maintain the required maintenance margin due to fluctuations in share prices. A margin call requires investors to deposit additional funds when the value of pledged securities declines.

The brokers’ association recommended that brokers be required to issue a margin call on the same day a client fails to maintain the maintenance margin.

Under SEBON’s proposal, if clients fail to maintain the required margin or do not remain in contact after a margin call, brokers may sell shares purchased under the margin facility. The association, however, suggested allowing brokers to sell such shares before the start of the next trading day, based on market conditions and risk assessment.

On valuation, SEBON has proposed that pledged shares be valued at 60 percent of the lower of the 180-day weighted average price or the prevailing market price. The brokers’ association has suggested raising this threshold to 70 percent.