Securities regulator tightens index-tagged margin loan limit

Just nine days after easing the margin lending policy, the securities regulator has slightly tightened the index-tagged ceiling of credit for investors to buy stocks.  

The new policy will take effect on January 1, 2021. 

Previously, the Bangladesh Securities and Exchange Commission (BSEC), last week, announced its new slab-based margin loan ceilings tagged-with DSEX – the broad index of Dhaka Stock Exchange. 

That margin loan policy, aimed at keeping the indices stable, was supposed to be effective from the beginning of the coming October. 

However, the regulator has cancelled this and said the old policy with a 1:0.50 margin loan ceiling will continue until the end of December this year. 

The abolished policy would have paved the way to increasing margin lending up to 100% against investors' equity when the DSEX went below 4,000 points. 

The higher the index travelled, the margin loan ratio would have declined – up to 25% against an investor's equity when the broad index went above 6,000 points. 

When the index was between 4,001 and 5,000 points, the maximum margin loan limit would have had to be 1:0.75 and the limit was supposed to be 1:0.50 when the index remained between 5001 and 6,000 points.  

The loan limit would have been 1:0.25 when the benchmark index went above 6,000 points.

However, as the market already has a strong footing, and experts are focusing on overall risk management in the stock market during the good days, the regulator has reappeared with a slight modification to the ceilings. They cap the maximum margin loan limit within 75% during the down days of the DSEX – with it remaining below 4,000 points. 

According to the new order, merchant banks and brokerage firms will be able to provide margin loans to their customers at a maximum rate of 1:0.75 when the DSEX index is below 4,000.

In other words, a maximum margin loan of Tk0.75 can be given against customers' own investment of Tk1. 

It will also be able to give a margin loan at the rate of 1:0.50 with the index remaining between 4,001 and 7,000 points.

Additionally, it will also be able to lend a margin loan at the rate of 1:0.25 when the index is above 7,000.

BSEC Executive Director and Spokesman Mohammad Rezaul Karim told The Business Standard, "We want to minimise risks about taking margin loans by investors because most general investors do not know the risk level of a share."

"Due to the rearrangement of margin lending policy, it will be possible to reduce those risk levels regarding investments," he added.  

He said merchant banks, portfolio managers and brokerage firms, who are involved in share trading through stock exchanges, will follow these rules.  

The member organisations at the Chittagong Stock Exchange will follow the same rules, using DSEX as the basis, he added.

"A margin loan is the money borrowed from a brokerage firm to purchase stocks," said Rezaul Karim.