Moneycontrol Pro Panorama | MTF is the new toy for traders

As more traders uncover these benefits, MTF funding is expected to expand further.

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India's market regulator, in coordination with the finance ministry, has been tightening regulations to limit retail participation in leveraged products such as futures and options (F&O). Recent measures introduced by SEBI, including removing certain derivatives and higher margin requirements, are designed to reduce the volume of derivatives trading. However, these changes may not directly address the core issue—retail traders' losses.

As retail traders face restrictions in the F&O space, many savvy participants have started shifting their focus to the cash segment of the market. Meanwhile, brokers have adapted to this by aggressively promoting margin trading funding (MTF), which allows clients to trade with borrowed capital. MTF enables brokers to offer leveraged trades, but with stocks that meet specific criteria set by regulators and exchanges such as lower volatility and strong fundamentals, receiving higher leverage.

For instance, buying stocks in companies like Reliance Industries or HDFC Bank can be highly leveraged under MTF. A client wishing to buy Rs 10 lakh worth of Reliance Industries stock would only need to provide Rs 2.5 lakh as a margin, with the broker funding the remaining Rs 7.5 lakh. However, this borrowed amount incurs interest, making it a crucial factor in the overall cost of the trade.

What makes MTF increasingly popular is the attractive interest rates that brokers are offering. New players in the market, like MStock from Mirae Asset Management, offer interest rates as low as 7.99 percent for high-value traders. The rates hover around 9 percent for retail participants, which still provides significant cost advantages.

This low-cost borrowing presents a compelling arbitrage opportunity. While futures trading might seem free of interest charges, many traders overlook the "cost of carry" involved—essentially the premium paid to hold a futures position, which can be higher than the cost of buying the same stock outright in the cash market.

Thus, MTF offers a new dynamic for smart traders to leverage low-interest funds without the hidden costs of futures contracts.

For instance, Reliance Industries is trading at Rs 2,736 per share in the cash market, its October futures contract is priced at Rs 2,741, and the November contract is even higher at Rs 2,757. If a trader needs to roll over his position from October to November, he must close the October contract and open a new position for November. This rollover incurs a cost—in this case, an additional Rs 16 per share (2757-2741).

If the trader continues rolling over positions over time, these incremental costs start adding up, significantly eating into their profitability.

In contrast, MTF, with its lower interest rates, now offers a competitive alternative to futures contracts. Especially when factoring in the cost of rollovers, MTF emerges as a more cost-efficient option for traders who want to hold positions for extended periods. This has led many traders to reconsider their strategies, shifting to MTF as an attractive solution.

Apart from differences in brokerage and trading costs, MTF offers significant tax advantages. While futures positions are taxed at 30 percent, cash positions benefit from a lower short-term capital gains tax rate of 20 percent. Additionally, interest paid on the funded portion of MTF trades can be claimed as a cost, tilting the scales further in favour of MTF.

Reports indicate that the total MTF book surged to Rs 84,800 crore by Friday, marking a 50 percent increase from Rs 57,101 crore in March 2024. As more traders uncover these benefits, MTF funding is expected to expand further.

Foreign brokers like MStock and those with banking arms hold a distinct advantage due to their lower funding costs. For retail traders, MTF offers yet another perk—flexibility in trade size. Unlike futures requiring fixed lots, MTF allows smaller, more manageable quantities.

Given the rapid expansion of the Indian equity market, the current MTF book size is not really substantial. However, the market regulator will need to keep a close eye on this growth in leverage to ensure it doesn't spiral out of control.

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