Margin Trade Funding: While there is a lot that continues to favour India's domestic trading firms, thanks to the market rally and an increasing number of investors, the growing list of regulatory compliances is pushing brokers to explore other avenues. This was quite evident recently when discount brokerage firm Zerodha announced its move towards newer products that aren’t focused on derivatives.
One such instrument is Margin Trade Funding (MTF). Even Groww launched this instrument on its platform just a few months ago. Here’s a quick guide to understanding MTF and how it works.
What is Margin Trade Funding?
MTF is a financial instrument that allows traders to borrow money from their brokerages to buy more securities than they could with just their own funds. This means that traders can play on higher amounts and pay back the borrowings with interest later.
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It's more like a loan traders take from brokerage firms. You make money when your profits are greater than the borrowed amount. If not, you end up losing money. While this instrument can help you in getting an edge over others at a much lower amount, the level of risk also takes a step up.
Why are Brokerage Firms Turning to Margin Trade Funding?
Margin Trade Funding (MTF) isn’t a new concept, and many traditional brokerage firms have already been offering it. However, discount brokers like Zerodha and Groww are now starting to include MTF in their services as they move away from products focused on derivatives and eventually diversify their services.
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This shift could be partly because the market watchdog, Securities and Exchange Board of India (Sebi), has been increasing the rules and regulations that brokers must comply with. This has pushed brokerage companies to look beyond traditional instruments and explore other investment avenues for their ever-increasing customer base.
When Zerodha announced its financial results earlier this week, the brokerage firm mentioned several risks playing out in the field almost at the same time.
A big part of this risk comes from the market regulator's new true-to-label circular, which is expected to come into effect from October 1.
There is a concern around revenue figures taking a massive hit once post-implementation. The brokerage house also pointed out a consultation paper on index derivatives, which is currently open for public feedback. Since index derivatives make up a large chunk of their portfolio, this could once again hit their revenue hard if it comes into effect.
Diversifying Away
The market regulator has time after time raised concerns about the increasing risk in derivative trading, especially in the futures and options segment. A recent study by the regulator also found that over 93 per cent of individual futures and option traders lost money between FY22 and FY24. According to the same data, the top 3.5 per cent of those who lost experienced an average loss of Rs 28 lakh each during the same period.
The market regulator's recent steps seem to have pushed discount brokerage firms to diversify their product offering to maintain their robust bottom lines.
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