SEBON Revises Margin Trading Directive, Allows Brokers to Lend Up to Five Times Net Worth

Brokers providing margin trading facilities will now be required to maintain a minimum paid-up capital of Rs 200 million under a new directive issued by the Securities Board of Nepal (SEBON).

Margin trading refers to the practice in which investors borrow funds from brokerages by pledging their existing shares as collateral to purchase securities. While this increases investors’ purchasing capacity, it also carries the risk of losses.

SEBON on Tuesday unveiled the new Margin Trading Facility Directive, 2025, which sets the revised paid-up capital requirement. The directive will come into effect from February 13. Under the previous Margin Trading Directive, 2017, brokers were required to maintain a minimum net worth of Rs 50 million to offer such services.

Under the new provision, companies providing margin trading services must not only meet the paid-up capital requirement but also obtain clearing membership. They must either hold depository membership, be a shareholder of a depository participant company, or operate as a subsidiary of a parent company that holds depository membership.

Brokers will now be allowed to provide margin trading facilities up to five times their certified net worth, compared to the previous limit of two times. However, the cap restricting margin exposure to a single client and their immediate family members to a maximum of 10 percent of the broker’s net worth remains unchanged. Brokers must also ensure portfolio diversification while extending margin facilities.

Companies with a minimum paid-up capital of Rs 200 million may provide margin services using their own resources, loans from banks and financial institutions, and unsecured loans from their shareholders and directors. Previously, they were permitted to mobilize funds only from internal sources or loans from commercial banks.

The new directive states that total borrowings from banks and financial institutions, along with unsecured loans from shareholders or directors, must not exceed 4.5 times the broker’s net worth. It also prohibits the use of one client’s cash or shares to provide margin facilities to another client.

The eligibility criteria for securities to be used in margin trading have also been expanded.

Under the revised provisions on initial and maintenance margins, brokers must collect an initial margin of at least 30 percent of the prevailing market value of listed securities. During the tenure of the margin facility, investors must maintain a minimum maintenance margin of 20 percent, depending on market conditions and risk assessment.

Investors bear the responsibility of maintaining the required maintenance margin in the event of market price fluctuations. If they fail to do so, the broker must issue a margin call.

Previously, the initial margin requirement was 30 percent of either the 120-day average market price or the prevailing market price of listed shares, whichever was lower. The maintenance margin requirement of at least 20 percent based on market risk remains broadly consistent. The new directive sets the maximum tenure of a margin trading facility at one year. Earlier, there was no clear provision regarding this duration.

To avail of margin trading services, investors must open a separate margin trading account through a broker. Brokers are also required to open a dedicated margin trading clearing beneficiary account at the Central Depository System (CDS) and Clearing Limited for settlement purposes. The investor’s margin trading account must be linked to the clearing member’s margin clearing beneficiary account.

Madan Paudyal, Managing Director of Nasa Securities, said brokers are encouraged by the expanded scope of the new directive, which incorporates their suggestions.

He said all broker companies would now work to make margin trading successful, unlike in the past. Earlier, brokers were limited to mobilizing resources mainly through loans from commercial bank. With the expansion of funding sources and the possibility of more facilitative borrowing policies from banks and financial institutions, brokers are expected to provide the service more effectively.

Although around three dozen brokerage firms had obtained licenses to provide margin trading services since its introduction in 2017, only Nasa Securities had begun operations. However, even Nasa has been unable to continue its services due to a lack of resources.