Margin trading signifies the purchase of securities by the crediting broker for the customer based on the mutual agreement between the parties and upon signing the contract and relevant forms, before remittance of the purchase price.
If the customer wishes to purchase securities on demand through a broker, he/she should submit his/her request to the crediting broker on special application forms and sign a contract to that effect.
Once such form is submitted, the crediting broker is appointed as the supervising broker in symbol in which the purchase on credit is made or in any other transaction symbols to be agreed between the customer and the broker. In such case, the customer waives the right of changing the broker.
Once such purchase on margin is making, the proceeds of the securities so purchased in the symbol(s) agreed between the customer and the aforementioned broker will remain under the supervision of the latter as supervising broker. As a result neither other brokers nor CSDI may change the supervising broker.
However, upon the mutual agreement of the crediting broker and the customer, the change and substitution of the securities on whose transaction symbol a broker change/appointment restriction has been imposed is possible. Also in case the customer, after imposition of restriction on the change/appointment of supervising broker in a transaction symbol due to a purchase on margin, purchases other securities in the same symbol, or already owns certain stock of the same symbol, the total proceeds of the securities owned by such customer in the said symbol is put under the supervision of the crediting broker.
Once the customer fully settles the price of the purchase already made on credit, the customer may apply for lifting the restriction by completing the appropriate application forms and submitting to the crediting broker the supportive payment evidences.
Upon receipt of the application form and having established the accuracy thereof, the crediting broker should adopt appropriate measures for the requested lift of restriction within not more than one work day.
Once the aforementioned steps are taken, the crediting broker shall remain as the supervising broker, as long as the customer has not changed the broker. The restriction is lifted only as means to allow the change of the supervising broker.
If the restriction is not lifted after the receipt of the customer's application to that effect, the customer may refer to other brokerage firms and submit the relevant application forms as well as the supportive documents evidencing the settlement of the price of the securities already purchased on margin. Upon receipt of the application form, the latter broker should acknowledge the receipt thereof and should electronically inform the crediting broker accordingly for the latter's confirmation and lifting of the restriction within not more than one work day. If the crediting broker fails to confirm the same within the set time limit, the provisions of Art. 36 of the Securities Market Law passed in 2005.
The crediting broker should take appropriate action for lifting the restriction imposed on the change/appointment of supervising broker as requested by the customer within not more than three work days after being informed of the receipt of such request by other brokerage firms, if he agrees with the same. The failure of the crediting broker in taking any action in this respect within the mentioned time limit shall be deemed as disapproval of the lift of restriction.
One of the risks posed in relation to the Margin Trade is the sale of the securities that have been purchased by the supervising broker on margin. As a matter of fact, the customer may sell such securities by changing the supervising broker.
The perfect solution to the problems arising from the control of a margin trade is the change of the existing post-trade system from semi-hybrid to full-hybrid model. However, this option has not won attention due to the time-taking nature of the changes that are needed to be made in the existing system as well as the sensitivity of the problems raised in as regards the control of the margin purchase.
Another approach is to impose restriction on the appointment/change of the broker who super-vises the securities that have been purchased on margin. In this way, the supervising broker keeps the securities till the price is settled. This solution can be more readily implemented. However, certain precautions have to be taken into consideration.
Imposition of restriction on the appointment/change of the supervising broker is a means thereby the broker ensures that the customer will be unable to sell the securities purchased on credit before the settlement of the price thereof by changing the supervising broker. This mechanism to a great extent reduces the risks the brokers face in controlling the purchased made by the customer on credit.