Nepal moves toward margin trading as NEPSE approves framework, Brokers ready for rollout

KATHMANDU: In a significant structural reform for Nepal’s capital market, the Nepal Stock Exchange (NEPSE) has approved the operational framework for margin trading, paving the way for its implementation within days. The decision, endorsed by NEPSE’s board on Wednesday, signals a major shift toward modernizing equity trading and improving market liquidity.

NEPSE spokesperson Murahari Parajuli confirmed that while the exchange has finalized its procedures, stockbrokers are also in the final stages of technical and operational readiness. “NEPSE’s trading system itself requires minimal changes, but brokers need to upgrade certain technological components, including transaction management systems and data backup infrastructure. Once that is completed, margin trading can begin,” he said.

Regulatory Backing and Operational Structure

The newly approved framework is aligned with the Margin Trading Facility Directive 2082 issued by the Securities Board of Nepal (SEBON). It outlines comprehensive provisions covering investor identification and due diligence, margin call mechanisms, settlement procedures, and share liquidation rules.

The framework also clearly defines documentation requirements, agreement templates between brokers and investors, and repayment procedures for margin loans. Importantly, it incorporates policies to ensure portfolio diversification, aimed at mitigating systemic risk in leveraged trading.

To offer margin trading services, brokerage firms must obtain formal approval from NEPSE. This includes submitting a board decision authorizing the service, along with required documentation. NEPSE will review applications and grant licenses only if all compliance conditions are met, while also notifying SEBON. Firms failing to meet criteria will receive explanations for rejection. Licenses must be renewed within three months after the end of each fiscal year.

Eligibility Criteria and Risk Controls

Margin trading will be limited to selected listed companies meeting strict eligibility benchmarks. These include a minimum of 2.5 million publicly floated shares, net worth equal to or exceeding paid-up capital, profitability in at least two of the past three years, and at least two years of listing post-IPO.

Investors must open a dedicated margin trading account with their broker to access the facility. The system also allows brokers to assign separate maintenance margins in cases such as rights share issuance.

If maintenance margin requirements are not met, brokers can issue a margin call, giving investors up to seven trading days to restore the required level. Failure to comply allows brokers to liquidate securities from the margin account starting from the eighth trading day.

In situations where shares are suspended due to mergers, acquisitions, or other corporate actions, brokers can demand additional collateral based on risk exposure. Conversely, if the market value of pledged securities rises above the initial margin threshold, investors may withdraw excess funds or shares, provided minimum margin conditions are maintained.

Settlement, Compliance, and Oversight

The framework mandates that brokers maintain dedicated margin settlement accounts within the CDS and Clearing Limited (CDSC). All margin transactions must be clearly identified during trading, settlement, and clearing processes.

Brokers are required to maintain detailed accounting records of margin trades and submit audited reports annually to both NEPSE and SEBON within three months of the fiscal year-end. NEPSE will conduct ongoing monitoring and inspections to ensure compliance.

Transaction fees will apply when transferring shares from a regular beneficiary account to a margin account, in line with existing regulations.

Brokers Signal Readiness

According to Sagar Dhakal, brokerage firms are largely prepared to launch margin trading services. “Apart from minor technical adjustments, all necessary preparations have been completed. Once NEPSE gives the final go-ahead, we will begin operations,” he stated.

Market Implications

The introduction of margin trading is expected to enhance liquidity, deepen market participation, and align Nepal’s stock market with international practices. However, it also introduces leverage-driven risks, making regulatory oversight and investor awareness critical in the initial phase.

For Nepal’s evolving capital market, this move represents a pivotal step toward sophistication, offering investors new opportunities while simultaneously testing the robustness of regulatory and institutional frameworks.