When traders step into the world of trading and start exploring Margin Trading Facility (MTF), they often lean towards one aspect—borrowing funds to amplify their purchasing power and take larger positions. But like most things that offer greater power and leverage, this margin facility comes with its own set of responsibilities, risks, and requirements.
In this blog, we break down how margin requirements work in the context of MTF and understand key factors that influence them. Whether you’re new to margin trading or looking to understand the mechanics better, this guide will help you navigate MTF requirements at Share India.
Table of Contents
How Does MTF Work?
MTF, or Margin Trading Facility, lets you take bigger positions in the market by borrowing money from your broker. Basically, you pay a part of the trade amount upfront — that’s your margin — and your broker covers the rest of the trade amount.
However, there’s more to it. When you use this margin facility, you need to keep a few things in mind:
- You have to maintain the required margin during your trade.
- Interest will be charged on the money you borrow.
- If your holdings lose value, you’ll need to cover those mark-to-market (MTM) losses on time.
Also, MTF is only available for certain approved stocks, and the shares you buy usually act as collateral until you’ve cleared your dues with the broker.
The Formula Behind MTF Margin Calculations
When it comes to figuring out how much initial margin you need for MTF, there are two simple formulas based on regulatory rules that you can use to estimate:
- Non F&O Stocks: Stock’s VAR (Value at Risk) + 5 times the Stock’s ELM (Extreme Loss Margin)
- F&O Stocks: Stock’s VAR + 3 times the Stock’s ELM
Example Scenario:
Let’s say you want to buy a stock priced at ₹100 (non-F&O stock). Supposedly, VAR is 5% and ELM is 4% of this stock. Here’s how the margin requirement would work:
Margin Requirement = VAR + 5 × ELM = 5% + 5 × 4% = 5% + 20% = 25%
This means the margin you need to pay upfront is 25% of the stock price, which equals ₹25 for a stock priced at ₹100.
What Does This Mean for You?
- You contribute ₹25 as your margin, and your broker funds the remaining ₹75 to complete the purchase of one share.
- With ₹100 in your account, you can buy 4 shares of this stock priced at ₹100 each (since each share only requires ₹25 as margin).
Note: Share India charges a minimum margin of 20% against all MTF positions to ensure you are adequately covered for your trades.
Key Factors That Affect Your MTF Margin and Other Important MTF Requirements
Now that you understand the basics of how MTF works, it’s important to be aware of the factors affecting MTF margin and your MTF positions:
Changes in VAR and ELM: The margin requirement can change if the stock’s Value at Risk (VAR) or Extreme Loss Margin (ELM) changes.
- Value at Risk (VAR) estimates the potential loss in the stock’s value under normal market conditions over a specific period. It helps measure the expected risk for a stock.
- Extreme Loss Margin (ELM) accounts for losses during extreme or stressed market conditions beyond what VAR covers. It acts as an additional buffer for sudden market shocks.
Together, VAR and ELM help determine how much margin you need to keep your MTF positions adequately covered.
Change in MTF Eligibility of Stocks: If a stock you’re holding under MTF is removed from the eligible MTF list (for regulatory, compliance, or risk reasons), your margin requirements may change accordingly, or you may be required to close your positions as per the regulations.
Mark-to-Market (MTM) Losses: MTM losses are the daily unrealised losses calculated based on the difference between your stock’s purchase price and its current market price. If the stock price drops below what you paid, you need to cover these losses promptly to maintain your MTF position.
Corporate Actions: Events like bonus issues, mergers, or demergers can affect your MTF holdings. You’ll need to exit your MTF position before the ex-date announced by the stock exchange for these corporate actions.
Stock’s Liquidity: Some stocks have low trading volumes, which can make it challenging to sell your shares quickly at desired prices, especially during volatile market periods. This liquidity risk is important to consider because it may impact your ability to exit leveraged positions smoothly.
Why Understanding These Factors Matters
Being aware of these factors affecting MTF margin and other MTF-related requirements is key to managing your trades effectively. Here’s why it’s important:
Ensure Timely Margin Payments: Meeting your MTF requirements at Share India on time is essential to keep your leveraged positions open. Staying informed helps you avoid margin calls and unexpected risks.
Avoid Forced Liquidation or Square-offs: If margin requirements aren’t met, your broker’s risk management system may liquidate or square off your positions automatically. Keeping track of your margins gives you better control over your trades.
Maintain Regulatory Compliance: Paying your margin and MTM obligations on time ensures you stay compliant with your broker’s rules and regulatory requirements.
Manage Risk: Navigating your margin changes and mark-to-market obligations helps you manage your exposure and capital more efficiently, especially during market volatility.
Conclusion
MTF offers a way to trade with leverage, but it comes with important responsibilities. Understanding how margin requirements are calculated, what factors influence them, and the related requirements is crucial. Staying informed helps you meet your obligations on time, avoid forced liquidations, and manage risks effectively. By keeping a close eye on these aspects, you can make more informed trading decisions and maintain better control over your MTF positions.
