The Capital Markets Authority (CMA) has moved to bar speculators from margin trading in new draft regulations that seek to unlock leveraged trading.
Margin trading is investing in shares using funds borrowed from a lender, typically a stock brokerage or an investment bank.
Traditionally, a margin trade involves a trader borrowing money from a broker by first depositing funds as collateral for the loan where the trader is then required to pay interest.
“A trading participant shall not provide margin financing facility to an investor who has engaged in securities trading for less than half a year, an investor lacking sufficient securities experience or lacking the financial capacity to shoulder the risks,” reads the draft.
The sieving out of speculators who are mostly retail investors is seen as a safeguard to protect part of the investing public from risks.
While the allure of margin trading is usually the ability for investors to increase share purchase, investors are usually at risk of losing more money than they have deposited into the margin account, requiring them to provide additional funds or incur a forced sale of securities if their portfolio declines below a minimum set value.
As such, margin trading, while amplifying the potential for gains, will also expand the chance for losses to an investor.
The CMA shall consult with the respective exchange to determine securities eligible for margin trading based on the liquidity of the security and market capitalisation.
Securities of unlisted companies, companies listed on an exchange for less than 12 months, privately placed securities and securities from inactive counters in the last three months shall be excluded from margin trading.
Traders shall be allowed to use borrowed funds but their exposure must not exceed the loan or 50 percent of the entity’s net assets.
