CDS and Clearing gets approval to operate margin trading platformMove is expected to boost market activity which has been in the doldrums for the past five weeks.
The Securities Board of Nepal has given the CDS and Clearing the green light to open a margin trading platform, a move that is expected to bring cheer to stockbrokers.
Margin trading is a platform that enables investors to borrow money from their broker to buy shares. Stockbrokers have long been demanding the regulator to allow them to carry out the function, citing that it could boost trading at the stock exchange market.
According to the board, on Thursday it gave the go-ahead to CDS and Clearing, a subsidiary of Nepal Stock Exchange, to initiate the platform. “Through amending the Securities Central Depositary Service Regulation 2010, we have allowed the CDS and Clearing to make necessary arrangements in the existing software. With the new law in place, the organisation can add required fields in its software to open a margin account and integrate it with Demat accounts of investors,” said Niraj Giri, spokesperson of the board.
When the margin trading comes into operation, investors who wish to take a loan from brokers will need to open a separate account with the concerned stockbroker. “The investors can then take the necessary funds they want to invest and settle the transactions via the stockbroker’s account at the CDS and Clearing,” said Giri.
As of now, investors have no other option but to take a loan from banks to buy shares, for which they have to undergo long procedures to receive such loans. Enforcement of margin trading is expected to end such hassles and provide investors with an easy avenue to get funds.
Gunanidhi Bhusal, a stockbroker at Aryatara Investment Securities, said the provision would help increase cash flow to aspiring investors. “It is also expected to raise the transaction volume at the secondary market, which is now experiencing a bearish trend due to low demand,” said Bhusal.
The country’s only stock exchange market has been posting losses for five straight weeks and lost 73 points while the market capitalisation has come down to Rs1,512.67 billion from Rs1,581.19 billion over the period.
Brokers are allowed to provide this facility through the use of their funds or by getting the required funds through banks. As per the law, brokers are allowed to lend twice their net worth for margin trading. They are required to keep a minimum margin of 40 percent citing risks in the secondary market.
Similarly, the brokers cannot lend more than 10 percent of lending capacity to a single client or multiple clients from the same family. The brokers are required to disclose all information relating to the facility such as initial margin, maintenance rate, margin call and service fee among others.
As per the securities board’s directive, stockbrokers with a net asset of Rs50 million can offer margin trading service to investors. Stockbrokers can issue margin loans of up to 50 percent of the value of the shares based on the 180-day average price or the prevailing market price, whichever is lower.
Similarly, stockbrokers can provide margin lending service to purchase shares of only those listed companies which have issued a minimum 10 percent dividend in the last two successive years. These companies should also have more than 10,000 shareholders.
In August 2018, Nepal Rastra Bank gave a green signal to the board to carry out the margin trading. While stockbrokers are allowed to fix the interest rate on the loan they will issue, the board can impose a cap if necessary. As of now, 13 out of 50 stock brokerage companies have taken a licence for margin trading while several others are waiting for theirs, according to the board.
Tulsi Ram Dhakal, vice-president of Nepal Investors’ Forum, said the margin trading would facilitate small investors in particular. “It will provide investors who are not used to the banking procedures to take out loans with easy access to funds,” he said.