Mumbai: India’s market regulator is considering lowering margin requirements for certain margin-funded stock trades in a move that could reduce capital locked up in such trades for brokers and investors.
The proposal, discussed and approved earlier this month by the Securities and Exchange Board of India’s (Sebi) secondary market advisory committee (SMAC), relates to margin trading facility (MTF) positions for futures and options (F&O)-eligible stocks where clients use cash for pay-in, according to two people familiar with the discussions.
This will align margin requirements with those applicable to MTF trades in other F&O eligible stocks, according to one of the people cited above, who spoke on condition of anonymity. “However, the committee has also asked Sebi to take a view on this,” this person added.
A consultation paper on the proposal is expected shortly, the second person said, adding that the industry is also discussing changes to the extreme loss margin (ELM) framework for MTF trades.
Sebi did not immediately respond to an emailed query.
Currently, MTF positions in F&O stocks attract an initial margin requirement equal to value at risk (VaR) plus three times the applicable ELM. However, when the cash collateral collected from a client is subsequently used for settlement obligations, the margin requirement on the funded stock rises to VaR plus five times ELM.
The SMAC’s proposal seeks to reduce this higher maintenance requirement to VaR plus three times ELM even in cases where cash collateral is used for pay-in, effectively lowering the margin burden on such trades. The move is intended to address what brokers see as an uneven framework between funded positions in F&O-eligible shares and MTF trades in other F&O stocks.
VaR is the minimum margin collected to cover expected daily price volatility in a stock, while ELM, or extreme loss margin, is an additional safety buffer collected to protect against sharp and unexpected market moves.
What is margin trading?
Margin trading allows investors to buy shares by paying only a portion of the trade value upfront while brokers fund the remaining amount against pledged shares or collateral. Investors are required to maintain margins on these funded positions and brokers can liquidate holdings if margins fall below prescribed levels.
Collateral provided by investors can be in the form of cash, cash equivalents or shares, and is marked to market daily to ensure margin requirements are maintained. If the value of the funded shares falls sharply, brokers can ask investors to provide additional funds or liquidate holdings to recover the loan.
For instance, a client buying an F&O stock worth ₹100 with a VaR of 12.5% and ELM of 5% currently provides an initial margin of 27.5%, calculated as VaR plus three times ELM. But if that cash margin is later used by the broker towards settlement obligations, the maintenance margin requirement rises to 37.5%, or VaR plus five times ELM. The proposed framework would keep the margin requirement unchanged at 27.5%.
“These are relatively liquid and actively monitored securities, so aligning margin requirements more closely with actual risk can improve capital efficiency for investors without materially compromising market safety,” said Raj Shah, co-founder and executive director at EPP Securities.
He added that upfront cash pay-in reduces settlement-related risks and strengthens the safety profile of MTF transactions. “In the case of F&O-eligible stocks, which already meet higher liquidity and surveillance standards, this provides additional comfort from a risk-management perspective,” Shah said.
The margin trading segment has expanded rapidly over the past year. The total MTF book grew 60% year-on-year to ₹1.14 trillion in April 2026, according to a May report by CareEdge Ratings. The National Stock Exchange accounted for more than 96% of total MTF volumes.
Other proposals
Apart from margin rationalization, the SMAC also cleared a series of proposals aimed at streamlining the MTF framework and widening participation.
The committee backed allowing early pay-in (EPI) credit to be used as collateral for MTF positions on the unfunded portion of sale proceeds, subject to recovery of the broker’s outstanding funded amount.
This would allow investors to immediately reuse their own contribution and profits from a sold MTF position without waiting for settlement cycles, while ensuring brokers first recover their funded exposure.
When a client sells securities from their demat account, the shares are blocked in favour of the clearing corporation. If these securities are delivered before the settlement date, the transaction is classified as an early pay-in.
For example, if you sell an MTF stock for ₹100,000 where your own cash down payment was ₹30,000 and the broker’s loan was ₹70,000, the broker first takes back their ₹70,000. You can then instantly reuse your ₹30,000 as margin for a new trade.
The panel also proposed tighter safeguards around broker capital deployment. Under the recommendation, twice the minimum net worth required for broking operations and other activities or 10% of a broker’s net worth, whichever is lower, would now be ringfenced at all times. The remaining net worth could then be deployed towards MTF activities within the existing cap of 5.5 times net worth.
Brokerage firms structured as limited liability partnerships (LLPs) may also be able to offer MTF to clients as approved by the SMAC.
“MTF books are growing across brokers despite the broader markets going nowhere. This isn't like the Korean markets, for example, where the markets are up 150% in the last year alone, and people are borrowing to ride that rally. Our situation is different,” said Shah from EPP Securities.
He added that the risk MTF poses is of the stock becoming illiquid in case there's a sharp market fall. “The odds of recovering a loss from a customer aren't that great.”