What is the MTF Facility?

Post Date : March 4, 2022

Margin Trading Facility (MTF)

Margin Trading Facility (MTF), known as a financial privilege in market terminology, provides buyers of shares and securities with the opportunity to acquire assets beyond their available cash resources. 

This mechanism functions in the following manner: 

Participants involved in MTF are required to pay only a fraction of the total transaction value, referred to as the margin. This method’s name, therefore, stems from this distinctive feature. A notable advantage of margin trading lies in the ability to utilize either cash or shares as collateral margin, albeit taking into account the reduced value of shares after adjusting for a haircut.

Additionally, margin trading offers several other benefits, which we will explore throughout this section, particularly the concept of leverage.

One of the most significant advantages of engaging in margin trading is the availability of leverage. Here’s how it operates: assuming you have Rs.1 lakh to invest, a broker might provide an additional funding of Rs.2 lakhs, enabling you to purchase shares worth a total of Rs.3 lakhs with just Rs.1 lakh in hand. Undoubtedly, this represents a substantial advantage, although it is important to note that interest payments are required on the utilized loan amount. Moreover, it is crucial to be aware of a particular advantage of margin trading: prior to 2017, the Securities and Exchange Board of India (SEBI) mandated cash-only margins. However, since then, SEBI has allowed margins to be paid using shares as collateral. This not only enables you to conserve your valuable cash but also makes effective use of idle shares held in your demat account. It stands as a significant benefit of engaging in margin trading.

Another key advantage of margin trading lies in its regulation and compliance with SEBI guidelines. The back-to-back nature of this facility, coupled with the collateralization of purchased shares, substantially mitigates risks for brokers. Consequently, brokers are more willing to offer favorable terms and conditions within the framework of margin trading. It is important to note that this MTF facility is exclusively available for select stocks with adequate liquidity, thereby ensuring risk remains under control.

You can pay the margin either in cash or by keeping shares as collateral depending on the availability.

What are the benefits of availing MTF Facility?