Equity ETFs can now be used as collateral

“Based on the feedback received from market participants, recommendation of Secondary Market Advisory Committee (SMAC) of Sebi and taking into account the emergence of exchange traded funds (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(margin trading facility) as well as an eligible collateral under MTF,” Sebi said in a circular.

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

The stocks or units of equityETFs 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, Sebi said.

“While providing the MTF, the stock broker shall 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. Stock brokers shall have appropriate board approved policy in this regard,” the regulator said.