What is Share Margin Financing (SMF)

Share Margin Financing

Share Margin financing is a convenient facility offered to traders seeking to expand their trading potential or for investors to leverage on their positions. Maybe some of you have yet to hear about this product, but this is not something new in the Stock Market. It is available to all eligible Malaysians, Residents and Non-Residents who have sounds financial standing.

This facility can be provided by conventional bank as well as broker/Investment bank. It is very common that 2 different entities in the same group (Example: RHB bank vs RHB Investment Bank) provide the facilities with different term and conditions.

This is because each of them is bound by different regulation where conventional bank was regulated by Bank Negara Malaysia (BNM) whereas Investment bank is regulated by Securities Commission (SC).

In essence, this is a loan facility to leverage on your new/existing stock holding position. Market participants can use Share Margin Financing as additional funding to purchase shares quoted or to be quoted on Bursa Malaysia.

As we know there are someone will finance their stock purchase by using some financing tools provided by the Bank for example like OVERDRAFT facilities. However most of the Overdraft charge you the rate of around 5%-7% and share margin will only charge you around 4.65%-4.85%. If you are holding a share that you will not be selling off no matter what price it is, you can actually transfer into margin account by pledging as collateral and withdraw the cash anytime whenever you need some cash.

Below Table show the difference if you Finance to buy share using Overdraft

Financing /Monthly Interest	Share Margin Financing 4.85%	Overdraft 7%	Saving
100,000	RM404	RM583	RM179
500,000	RM2020	RM2917	RM897
1,000,000	RM4040	RM5833	RM1793

There are a few important terms that you should know before you apply share margin financing as below:

When Application:

TERMS	DESCRIPTION
Document	Photocopy of IC; 1 of the following document: Ø  CDS Statement from Bursa Ø  Latest 3 months bank statement(With salary detail) Ø  Latest 3 months salary slip Ø  Latest Tax document(B/BE/EA)
Drawdown facilities	Usually bank will have financing amount of at least RM50,000
Stamp duty	0.05% of financing amount
Interest rate	BLR- X%(1.5-2.5%) or Base Rate + X% rate
Fees And charges	Rollover fees, Committement fees, annual renewal fees, cash withdrawal charges, Nominees charges P/S: Most of the bank will waives all kind of abovementioned charges except Nominees charges(corporate action fees) .

Before Trading:

Accepted Collateral	In a form of Cash/ FD/Listed Securities
Limit	= Cash/FD x 2.5 or Securities x 1.5 (Depend on the Bank Marginable percentage on respective securities & cannot exceed financing amount )

When Trading:

There will be a different calculation method for the Margin ratio but all should practice the same concept.

Security Coverage =           Equity Value­­­­_________ x 100%

Current Outstanding Balance

TERMS	DESCRIPTION
Share Margin Financing ratio	Some bank will call it Margin of advance, Margin of Finance(MoF), which is your current Financing status /Security Coverage Ratio P.s : Some lenders calculate margin of finance using an inverse of the above formula.
Margin Call Ratio:	Below 150% (<150%)
Force Selling trigger Ratio :	Below 130% (<130%)
Withdrawal Request Minimum ratio	Cash Withdrawal =<167% Securities Withdrawal =<200%

Scenario 1(Financing/Loan Amount = RM 150,000)

Investor A Profile

Ø  Collateral = RM50,000 (Cash /FD)

Ø  Limit Can be utilize = 50,000 x 2.5 = RM125,000

If Fully utilize the RM125,000

Securities Coverage =  _________RM125,000 (Total securities value)   ­­­­               x 100%

 RM125,000 (Total utilized loan) - RM50,000(Colleteral)

Margin Call =<150%

You will be on margin call when your share drop below RM112,500

(Use your outstanding balance times the ratio –> RM75,000 * 150%)

Force selling = <130%

Same calculation here which mean you will need to rectify your account when your Equity Value drop below RM 97,500

P.s : Please always consult your dealer /Remisier if you have the difficulty on calculate this ratio.

Above is the common thing that an investor shall know when they open a share margin account. However,I would like to highlight another benefit of using Share Margin Account which might not be known to all investor.

Let me show you how this thing works.

Scenario 1-Investor B Profile

Ø  Collateral = RM60,000 (Public bank 3,000 unit @RM20.00)

Ø  Limit Can be utilize = 60,000 x 1.5 = RM90,000

You can choose to buy additional RM 90,000 worth of stock based on your collateral (Please bear in mind you might get margin call if both your PBB and new purchase is dropping)

Or you can withdraw cash based on your collateral. (In this cash PBB shares) (All price movement and corporate action including dividend still belong to you)

Securities Coverage =           RM 60,000     ­­­­__      x 100% = 167%

          RM 35,925

The outstanding amount is RM35,925 and mean you could withdraw maximum up to this number out for your own usage and bank will charge you interest on your withdrawal amount as well. 

How margin call work

Investor B Profile

Ø  Collateral = RM60,000 (Public bank 3,000 unit @RM18.00)

Ø  Limit Can be utilize = 54,000 x 1.5 = RM81,000

Securities Coverage =           RM 54,000     ­­­­__      x 100% = 167%

          RM 32,335

You will have to top up RM35,925-32,335 = RM 3,590 within 3 days grace period.

In Summary, this is a flexible facility that allows you to withdraw the cash and look for some higher return investment without selling your share or utilize it to repay your debt which charges you higher interest rate.

This is a guest post contributed by Martin Heng Sin Soon, an Equity Dealer with RHB Investment. You may contact him via martinheng87@gmail.com