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Beginner’s Guide to Share Margin Financing in Malaysia

Updated 19 Jun 2018 – By Loanstreet


In collaboration with 

Share Margin Financing (SMF) isn’t a term you’d hear on a daily basis. This facility can, however, improve your financial standing when used correctly. If your curiousity is now piqued, allow us to walk you through how the whole process works, so that you can have a better understanding before you dip your toes in!

 

Watch this video if you'd like to learn what share margin financing is about, in just two minutes!

SMF is a type of revolving credit facility that’s provided to investors, allowing them to finance their share trading and investment activities. With it, one can buy shares on borrowed money that's secured by one’s collateral of choice. In Malaysia, this facility can be provided either by conventional banks (like Hong Leong Bank) or brokerages/investment banks.  

Facilities provided by conventional banks are regulated by Bank Negara Malaysia, whereas brokerage-provided facilities are regulated by the Securities Commission Malaysia. It’s not uncommon for two entities under the same group to both provide their own SMF packages, albeit with differing terms and conditions.

We now come to the crucial part: the collateral! This is required for you to be eligible for share margin financing. Acceptable forms of collateral include cash, unit trusts, fixed deposits and/or quoted securities on Bursa. It’s important to note that acceptable types of collateral may differ based on where you sign up for this facility.

While largely similar, there are some subtle differences in the SMF packages provided by banks and brokerages. If you’re confused by the words used in the documents, don’t worry, you can always ask the friendly experts at Hong Leong Bank! In addition, we’ve provided a table below that contains some of the basic terminologies commonly used in SMF, along with the respective explanations:

TERMINOLOGY DESCRIPTION
Margin of Finance (MoF) a.k.a. Share Margin Financing Ratio


The maximum amount of financing available based on the underlying collateral.
MoF = (Total Outstanding Loans - Cash or FD) / Total Share Equity

  • Typically ranges from 50-60%
Advance / drawdown facility

Borrowers can withdraw advances or surplus cash (new purchased securities, dividends & profits) from the margin account within the financing ratio limit.

However, not all lenders provide such a facility. This is more common for bank-provided facilities.

Interest rate

The interest that is charged on the utilised facility amount. Can be fixed rate or floating rate.

Interest is computed on a daily rest basis based on the end-day balance of the account. This daily interest is accumulated and is due and debited into the client's account at the end of the calendar month.

Rollover fees*

Charges for outstanding share purchase contracts that are carried over to the next period (normally brought forward on a quarterly basis).

*This fees structure does not apply to Hong Leong Bank.

Margin call

A margin call is made by the lender when the value of the collateral falls below a certain percentage to the financed amount.

When a margin call is made, the borrower is required to top-up the value of the collateral (i.e. pledge more collateral that can be in the form of shares, fixed deposits and unit trusts) or reduce the outstanding loan to meet the required MoF within three trading days.

Force sell

Should the MoF exceed the approved force sell ratio (e.g. 80%) or the borrower fails to rectify a margin call within the given grace period, the lender would then have the right to sell or dispose of the security pledged or any part thereof.

This is known as a force sell.

Margin multiple

This is a multiplier on the value of the pledged collateral which defines the maximum amount of financing available.

E.g.: A bank provides 2.5x financing for pledged FD.

So by pledging a FD of RM50,000 you would get:
Available trading limit = RM50,000 x 2.5 = RM125,000

 

Example of a scenario

Let’s take a look at a simplified scenario so that you may have a clearer comprehension. Johan can proceed to purchase a basket of shares valued at RM250,000. This brings his margin of finance squarely to his limit of 60%. Here’s how we got this conclusion:

Margin of Finance (MoF)
(Total Outstanding Loan - Cash Deposit) / Total Share Equity
= (RM250,000 - RM100,000) / RM250,000
= RM150,000 / RM250,000
= 60%

When the value of the stocks climbs to RM300,000, Johan’s Margin of Finance becomes 50%.

Margin of Finance (MoF)
(Total Outstanding Loan - Cash Deposit) / Total Share Equity
= (RM250,000 - RM100,000) / RM300,000
= RM150,000 / RM300,000
= 50%

Because of this, Johan can now afford to borrow some more to finance his purchase of the shares. He decides to purchase additional stocks for a total of RM75,000.

Margin of Finance (MoF)
(Total Outstanding Loan - Cash Deposit) / Total Share Equity
= (RM250,000 + RM75,000 - RM100,000) / (RM300,000 + RM75,000)
= RM225,000 / RM375,000
= 60%

After his additional purchase, the value of the stocks gradually declines. When the value reaches RM330,000, the bank makes a margin call as his margin of finance has increased to 68%, which triggers a margin call.

Margin of Finance (MoF)
(Total Outstanding Loan - Cash Deposit) / Total Share Equity
= (RM250,000 + RM75,000 - RM100,000) / RM330,000
= RM225,000 / RM330,000
= 68%

At this point, Johan will have to top up cash or sell off some shares to bring his margin of finance back down to 60% to avoid the bank from making a force sell.

 

To conclude

Share margin financing is considered a sophisticated facility meant for stock market investors. However, it is not immensely difficult to understand, and even less difficult to get! Lastly, make sure to always practice caution and do not over-leverage when using financing to make investments in the stock market.

For more information on the SMF facility, visit your nearest Hong Leong Bank branch or call: 1300-88- 2588. You can also check out their website www.hlb.com.my/smf#applyNow

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