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For a retail investor or trader, It is important to know and understand the Source of Funds for the broker for providing margin trading facility to his clients and maximum permissible borrowing by any broker
To provide the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks and/or NBFCs regulated by RBI. A broker shall not be permitted to borrow funds from any other source.
The broker is not allowed to use the funds of any client for providing the margin trading facility to another client, even if the same is authorized by the client.
At any point of time, the total indebtedness of a broker for margin trading shall not exceed 5 times of his net worth
The “maximum allowable exposure” of the broker towards the margin trading facility shall be within the self-imposed prudential limits and shall not, in any case, exceed the borrowed funds and 50% of his “net worth”. The term “exposure” will mean the aggregate outstanding margin trading amount in the books of the broker for all his clients.
While providing the margin trading facility, the broker shall be prudent and also ensure that there is no concentration on any single client. In any case, the exposure to any single client at any point of time shall not exceed 10% of the broker’s lendable resource (i.e. borrowed funds for margin trading + 50% of net worth).
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