MTF boom could have hidden risks for brokers despite SEBI safeguards: Zerodha's Nithin Kamath

Under current regulations, brokers can offer leverage of up to five times on many stocks, requiring only 20% margin from clients.

• Nithin Kamath warns of rising risks from rapid margin trading facility expansion
• MTF exposure has grown five-fold to over Rs 110 lakh crore in four years
• Kamath: Weak risk models may amplify losses during market corrections.

Did our AI summary help?

Zerodha co-founder and CEO Nithin Kamath has flagged growing risks for brokers amidst the rapid expansion of margin trading facility (MTF), which could amplify losses during a sharp market correction.

In a post on Social Media platform X, Kamath said MTF exposure across the industry has grown nearly five-fold over the past four years to more than Rs 110 lakh crore, driven in part by higher margins and securities transaction tax (STT) in the futures and options (F&O) segment. However, he cautioned that while leverage has increased sharply there is no real risk model in play for brokers.

Under current regulations, brokers can offer leverage of up to five times on many stocks, requiring only 20% margin from clients. According to Kamath, intense competition among brokers has led most firms to offer the maximum permissible leverage. “If you don’t, you lose business. It’s a classic race to the bottom,” he said.

Kamath also argued that MTF carries higher and more complex risks than F&O trading. Unlike derivatives positions, which are typically held for days, MTF positions can remain open for months. Additionally, MTF is permitted in around 1,300 stocks, including many illiquid names, compared with roughly 200 highly liquid stocks in the F&O universe. The risk is further compounded because MTF largely involves long-only positions, limiting natural two-way market flows that help stabilize prices.

He also highlighted the leverage escalation that occurs when stocks are accepted as collateral. For example, a client holding shares worth Rs 1 lakh may receive collateral value of Rs 80,000 after a haircut, which can then be used to take MTF positions worth up to Rs 5 lakh. “This is where leverage becomes insane,” Kamath noted.

Kamath warned that India’s equity markets tend to lose liquidity rapidly during market drawdowns, especially outside large-cap stocks. With limited short-selling activity through the securities lending and borrowing (SLB) mechanism, there is often no natural buying support when prices fall. In such conditions, forced liquidations triggered by margin calls can become self-reinforcing, particularly in non-F&O stocks.

While the Securities and Exchange Board of India (SEBI) has capped MTF exposure at 50% of a broker’s net worth plus borrowings or up to five times net worth to prevent broker defaults, Kamath said these safeguards mainly protect the system from broker failures, not from widespread client defaults.

“We haven’t seen a 2008, 2015, or COVID-type event since MTF scaled up. When we do, it will cause mayhem—not because any broker fails, but because forced selling into illiquid markets will cascade," he said.

Kamath added that the impact of such a correction would be significantly worse beyond the top 200–300 stocks, where liquidity is thinner. Responding to questions about risk management frameworks, he remarked that there is effectively no robust model in place. “If ‘praying’ that stocks don’t fall counts as a model then yes, there is one," he said.

He added that a substantial portion of the interest income and potentially even capital earned by brokers during the MTF boom could be wiped out during a rapid market downturn.