Capital markets regulator Sebi has allowed brokers to extend the margin trading facility (MTF) to equity exchange traded funds (ETFs) and such funds can be used as collateral as well. Currently, only select stocks that come under Group 1 securities are offered the MTF facility by brokers.

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"Taking into account the emergence of ETFs as an investment product with various advantages such as transparency, diversification, lower cost, etc, it has been decided to allow units of equity exchange traded funds (equity ETFs)… as an eligible security for MTF as well as an eligible collateral under MTF," Sebi said in a circular.

The facility is executed with borrowed funds or securities that enable investors to take exposure in the market over and above their resources.

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Sebi said that initial margin payable by the client to the stock broker should be in the form of cash, cash equivalent or equity ETFs.

Further, the stocks or units of equity ETFs deposited as collateral with the stock broker for availing collaterals and the stocks or units of equity ETFs purchased under the funded stocks should be identifiable separately and no co-mingling would be permitted for the purpose of computation of funding amount.

While providing the MTF, stock brokers will have to ensure that exposure towards stocks and units of equity ETFs purchased under MTF and collateral kept in the form of stocks and units of equity ETFs are well diversified, Sebi said.

Stock brokers will be required to have appropriate board-approved policy in this regard.

For the purpose of providing the MTF, a stock broker may use own funds, borrow funds from scheduled commercial banks or NBFCs regulated by RBI, borrow funds by way of issuance of Commercial Papers (CPs) and by way of unsecured long term loans from their promoters and directors.

The circular will come into force from December 30, the Securities and Exchange Board of India (Sebi) said.

Also read: SEBI reduces timeline for listing of debt securities issued on private placement basis