Proposed SEBON Margin Trading Directive Raises Serious Concerns; Experts Warn of Structural Risks for Investors

The Securities Board of Nepal (SEBON) has drafted a new margin trading directive aimed at tightening oversight of leveraged trading and strengthening brokerage risk controls. While the draft appears, at first glance, to introduce discipline in the market, analysts caution that several provisions—especially those related to collateral valuation and forced liquidation—could unintentionally harm ordinary investors. Market experts argue that without careful revision, the directive may undermine confidence at a time when the stock market is already struggling with weak liquidity and fragile sentiment.

Dual Standards in Collateral Valuation

One of the strongest criticisms directed at the draft guideline relates to the valuation of securities kept as collateral. According to analysts, the directive treats the same security differently depending on whether it is being borrowed as cash or pledged as collateral.
If an investor owes Rs. 1,000 to a broker, that liability is recognized at full value. However, if the same investor pledges shares worth Rs. 1,000, the directive allows brokers to discount the value by up to 40 percent, treating it as collateral worth only Rs. 600.

Financial experts describe this as a “dual-pricing anomaly” that contradicts fundamental economic principles such as the Law of One Price, which states that a single asset should have a uniform value in any market. By valuing liabilities at 100 percent but assets at only 60 percent, critics argue that the draft guideline disproportionately protects brokers while unfairly penalizing investors who may already be under pressure during market downturns.

Risk–Reward Imbalance Across Company Categories

The directive further proposes different margin levels for different classes of listed companies. Shares of companies classified as Group “B”—generally considered financially sound—will require higher collateral margins (stricter terms), whereas relatively weaker companies under the “Others” category will be allowed lower margins.
Analysts say this goes against modern portfolio theory, which suggests that lower-risk assets should accommodate higher leverage, not less.
By making stronger companies less attractive for margin financing, the rule could inadvertently push investors toward riskier securities, elevating overall market volatility.

Market participants say the objective of the regulator should be to incentivize investment in stable companies, not encourage speculative positioning in weaker counters.

Asymmetry in Gains and Losses

Another debated clause is related to how increasing and decreasing share prices are treated. If the value of pledged shares rises, the investor receives no additional borrowing capacity. However, if prices decline, margin calls are triggered immediately, requiring the investor to inject fresh funds or face forced sale.
Analysts describe this as an ‘asymmetric agreement’ because losses are fully transferred to the investor while gains bring no incremental benefit.

Legal and financial experts argue that fair contracts must offer balanced treatment to both parties. They warn that the proposed system exposes investors to one-sided obligations, potentially worsening financial stress during downturns.

Forced Liquidation Without Adequate Notice

Perhaps the most alarming concern relates to the conditions under which brokers can liquidate an investor’s pledged shares. The draft gives brokers the right to sell collateral if they are “unable to contact” the investor during a market decline.
Stakeholders argue that such a provision contradicts the principles of natural justice, which require a fair opportunity to respond before punitive action is taken.
They say that in the age of digital communication, liquidation should be triggered by a clear, time-based notification system—not a subjective assessment of failed contact.
If implemented as written, the rule could open the door to disputes and allegations of forced selling during market panic.

A Call for Balanced Regulation

Financial experts emphasize that regulatory tightening is essential for a healthy capital market, but warn that poorly designed rules could backfire. They stress that investor confidence is the foundation of Nepal’s emerging capital market, and any framework that disproportionately burdens small investors could weaken the market rather than stabilize it.

The draft, they say, appears to prioritize the safety of brokers at the expense of the investing public. Critics urge policymakers to revise the valuation method of collateral, harmonize margin requirements across company categories, and ensure that any liquidation procedure respects due process.

Investors Seeking Fair Valuation and Predictability

Market observers note that the heart of the issue lies in fair valuation. Unless collateral is assessed at a just and consistent value, the margin facility may become more of a liability than a support system for investors.
Stakeholders argue that the market cannot flourish if the regulatory framework discourages participation. A balance must be struck where brokers are protected from default, but investors are not unfairly burdened by punitive or one-sided provisions.

As SEBON prepares to finalize the directive, calls for deeper consultation with investors, brokers, economists, and legal experts are growing louder. The capital market community stresses that sound regulation should build trust, not fear. Ensuring fairness, transparency, and proportionality will be essential for the long-term development of Nepal’s capital market.