Funded stocks

Under a margin trading facility, a client puts up part of the price and the broker funds the rest. The shares bought with that borrowed money have a name of their own — funded stocks — and the rules treat them differently from the collateral the client separately pledges to get the facility in the first place.

The key idea is separation. Collateral is what the client puts up to be trusted with a loan. Funded stock is what that loan actually bought. They must never be mixed together when the broker works out how much margin the client still owes.

The workbook (Chapter 8, section 8.7) sets out the funded-stock rules:

• Segregation. Collateral pledged for margin trading and the funded stocks bought with the funding must be identifiable separately, and no comingling is permitted when computing the funding amount.
• Daily marking. Both collateral and funded stocks are marked to market daily.
• No extra exposure on appreciation. A rise in collateral value can earn the client further exposure; a rise in the value of funded stock cannot.
• Custody. Funded stocks are held by the trading member or clearing member only by way of pledge, in a separate demat account tagged "Client Securities under Margin Funding Account," where no other transactions are permitted, and they are transferred there through an auto-pledge.
• Margin rate. The applicable margin on funded stock is VaR + 5 times Extreme Loss Margin, whether or not the funded stock is available in the F&O segment — a higher rate than ordinary collateral of the same stock, which can attract VaR + 3 times ELM if it happens also to be an F&O stock.
• Mark-to-market top-up. If the market value of the funded stock falls below its funded cost, the member must additionally collect MTM margin, in cash or non-cash collateral.

A client buys 1 unit of a Group 1 F&O stock at Rs 100 under margin trading, with VaR of 12.5% and Extreme Loss Margin of 5%.

Initial margin, as ordinary MTF collateral, would be VaR + 3 x ELM = 12.5% + 15% = 27.5% of Rs 100.

But suppose the client's Rs 27.50 of cash margin is instead used for pay-in, and the funded stock received from the clearing corporation is kept as maintenance margin. The rate on that funded stock jumps to VaR + 5 x ELM = 12.5% + 25% = 37.5%, applied to the lower of cost or market value of the funded stock — Rs 72.50 in this case.

Now suppose the stock's closing price falls from Rs 100 on day T to Rs 90 on T+1. The client has an MTM shortfall of Rs 10 (100 − 90), which the broker must collect as additional margin, on top of the maintenance margin recalculated on the new, lower market value of Rs 90.

Chapter 8 (Other Services Provided by Brokers, section 8.7, Margin Trading) works through funded stocks in the same worked examples as margin trading facility itself, with the VaR + 3 x ELM versus VaR + 5 x ELM contrast repeated across several numerical illustrations. Expect a calculation switching between the two margin rates depending on whether cash collateral or funded stock is being margined.

• VaR + 3 x ELM is for eligible F&O collateral; VaR + 5 x ELM is for funded stock — regardless of whether the funded stock happens to also be an F&O stock.
• Appreciation in funded stock value earns no extra exposure — only appreciation in collateral value can.
• Funded stocks sit in a dedicated demat account — "Client Securities under Margin Funding Account" — for margin-funding shares only, held by pledge, never comingled with ordinary collateral.
• A fall in the funded stock's market value below its cost triggers an additional MTM margin call, separate from the maintenance margin recalculation.
• Do not confuse funded stock (what the borrowed money bought) with collateral (what the client pledged to access the facility) — the workbook is explicit that comingling the two for margin computation is not permitted.