Friday, February 1, 2019

Stock brokers can float margin lending

The Securities Board of Nepal (Sebon) has allowed stock brokerage firms to provide margin lending. The stock brokerage firms – currently allowed only to execute trading orders placed by their clients in the secondary market – will be able to provide marging lending to their investors to buy shares.
Issuing a circular today the regulator for the capital market – Sebon directed the Nepal Stock Exchange (Nepse) and brokerage firms – paved the way for brokerage firms to provide financing service to purchase stocks for their clients in the secondary market. "The interest rates will however be monitored by the Sebon and Nepse," the circular reads, adding that the brokerage firms will be free to set their interest rates on the margin loan but the interest rates should be mentioned in the contract. "The firms should also pre-inform Nepse and Sebon about the interest rates."
A panel formed by Finance Ministry last month has recommended margin lending by stockbrokers to address problems in the stock market. Margin trading allows investors to buy shares by borrowing money against stock as collateral. Investors need to have a margin account with a brokerage firm – to trade on margin – while the stockbrokers can fix the interest rate on such loans.
According to the Securities Board’s directive issued last year, stockbrokers with a net asset of Rs 50 million can offer margin trading service to investors. "Stockbrokers can issue margin loans amounting up to 50 per cent of the value of the shares based on the 180-day average price or the prevailing market price, whichever is lower," the directives read, adding that a potential investor has to deposit up to 50 per cent of the value of the stock to be purchased while the rest of the money is put up by the stockbroker.
Of the total 50 stockbrokers in the country, all are eligible to provide margin loans, according to the Stockbrokers’ Association of Nepal president Bharat Ranabhat.
It took the capital market regulator a year to finalise working procedure for implementation of the marging lending service also due to complication about who will monitor the interest rates, though the Sebon had first mooted the idea to introduce margin lending service from brokerage firms in November 2017.
Though the Nepse had drafted the working procedure on margin transaction service last May in line with a Sebon directive of November 2017, it could not be issued  due to disagreement between the Sebon and central bank – that is responsible for monitoring interest rates – over the issues of jurisdiction to monitor the interest rates.
Earlier, the central bank had said that the brokerage firms that wanted to provide margin lending service should get permission from the central bank, which is the regulator of financial sector. The Sebon has however informed the new arrangement including the working procedure and its earlier directive to the central bank.
The margin lending facility from brokerage firms will make the investors free from relying on bank and financial institutions (BFIs) for loans to buy stocks in the secondary market.

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