Know about the MTF Pledge of Shares and Margin Trading – Margin Funding ( MTF) is a scheme that provides instant funding of an amount upto certain percentage against the existing shares to increase the buying power for delivery. Interest is charged only on the amount used, and only for the period it is used.
Pledging of securities : Current practice, when a customer pledges security as margin for F&O, the securities move to the broker and through the broker to the clearing corporation, afterwards margins are provided to the customer with haircut.
In the new structure, the securities remain in the client demat, but a pledge is marked in favor of the broker (Trading Member) who in turn pledges to the Clearing Member (CM) and in turn with Clearing Corporation(CC). For this pledge to be marked, the customer will need to authenticate the transaction using an OTP.
MTF or Margin funding
Today, brokers allow you to buy securities worth more than the money in your trading account under margin funding. For example, if you had Rs one lakh in your account, a broker might allow you to buy say Rs 4 lakhs of any company shares.
These shares will not be credited to your demat account until the full amount is paid. The broker would charge interest on the Rs three lakhs lent for this transaction. The shares would remain in the broker’s client pool account until they are fully paid for. But with this new circular, it seems to say that the securities will have to go back to the client account and then be pledged as margin.
Also Read – PSBs ESPS, A Lost Game for Employees
Why MTF, a Problem for Brokers ?
The issue with this is that there is no guarantee that the client will go through the OTP authentication to pledge after the shares are credited to the client demat. And the client thus assumes ownership of all shares while they are still not fully paid for.
For the purpose of providing collateral in form of dematerialised securities as margin, a client shall initiate the margin pledge only in favour of the TM / CM’s separate client securities margin account tagged as ‘Client Securities Margin Pledge Account’ through physical instruction or electronic instruction mechanism provided by the Depositories.
Such instructions shall have details of client UCC, TM, CM and Default Segment.
2. In cases where a client has given a Power of Attorney (the “POA”) to the TM / CM, the TM / CM may be allowed to execute the margin pledge on behalf of such client to the demat account of the TM / CM tagged as ‘Client Securities Margin Pledge Account’.
3. The ‘pledge request form’ shall have a clause regarding express consent by the client for re-pledge of the securities by the TM to CM and further by the CM to CC.
4. On receipt of the margin pledge instruction either from the client or by TM / CM as per the POA, DP of a client shall initiate a margin pledge in the client’s account and the status of instruction will remain pending till confirmation is received from client / pledgor. The client will submit acceptance by way of One Time Password (the “OTP”) confirmation on mobile number / registered e-mail id of the client or other verifiable mechanism. Such OTP confirmation from client shall also be required, if securities of such client are being re-pledged. The Depositories shall develop a verifiable mechanism for confirmation of the pledge by the client.
5. In client account, margin pledge or re-pledge shall be reflected against each security, if it is pledged / re-pledged and in whose favour i.e. TM / CM / CC.
6. The TM can re-pledge only in favour of CM’s demat account tagged as ‘Client Securities Margin Pledge Account’. The CM shall create a re-pledge of securities on the approved list only to the CC out of ‘Client Securities Margin Pledge Account’. While re-pledging the securities to the CC, CM/TM shall fully disclose the details of the client wise pledge to the CC/CM. CM would need to have visibility of client level position and client collateral so that CM shall allow exposure and / or margin credit in respect of such securities to that client to whom such securities belong.