What Is Liquidation in MTF? Meaning & Process Explained

The liquidation of a margin trading facility (MTF) refers to a broker's forced closure of a client's trading position. It happens whenever the value of the account goes below the required maintenance margin, and the client does not offer added collateral or deposit funds to meet the margin call (within a particular timeframe).

Since MTF customers receive leverage from brokers to purchase more stocks than they originally could with available cash (using the collateral as the loan security), brokers need clients to maintain a minimum margin (to manage risks linked to these loans). 

What happens is that the client's positions are closed, often at less favourable market prices, which may lead to major losses exceeding the initial investment at times. The client also remains responsible for shortfalls after liquidation and may have to pay added penalties or charges. 

When Does Liquidation Occur?

Liquidation in a margin trading facility (MTF) typically occurs when traders fail to maintain the required margin in their accounts. This leads the broker to sell securities to cover shortfalls automatically. Some scenarios leading to MTF liquidation include: 

• Not meeting margin calls: If the value of the MTF position falls below the required maintenance level, the broker will issue a margin call. If the collateral/funds are not added within the required timeframe (usually up to 5 working days from the call date), the broker will liquidate the position. 
• Share pledging failures or insufficient initial margin: After purchasing stocks under MTF, you have to pledge the same as collateral, mainly by the end of the trading day. Not doing so will lead to the squaring off or liquidation of the position. 
• Major MTM (mark-to-market) losses: Even with the margin call process, the risk management setup of the broker has to sometimes square off positions instantly in the case of high MTM losses (touching/crossing 80% of the initial margin or if coverage falls below 20%), particularly in volatile market scenarios. 
• Other factors: These include stocks undergoing corporate actions such as splits, bonus issues, mergers, etc.; stocks moving out of the eligible Group I list as classified by SEBI/stock exchanges; failure to repay outstanding interest; and so on. 

Key Triggers: Margin Shortfalls, Collateral Decline & More

Some of the main triggers for liquidation in MTF include: 

• Margin shortfalls (when funds and collateral in the account go below the minimum margin level as set by the regulators/broker)
• Collateral drops (reduction in market value of stocks bought under MTF and pledged as collateral)
• Margin call failures (not meeting calls by allotting added shares or funds within the timeframe specified)
• Non-pledging of MTF holdings 
• Changes in margin requirements of brokers/exchanges
• Sudden ineligibility of particular stocks for MTF
• Not paying the dues 

Groww’s Liquidation Policy and Thresholds

Groww has a clearly outlined policy stating that it will be forced to square off/liquidate securities without further notice in specific scenarios. At the same time, in other situations, it will require prior client notification (failing which, it will liquidate the holdings).

The positions may be squared off without notice if the MTM loss across all products combined reaches 80% of the total available margin.

A margin call will be initiated if the holding coverage reaches 85% or lower. If the client does not cover it within the T+1 trading day, Groww will liquidate positions to the extent necessary to make up for this decline on the next day of trading. 

How You’ll Be Notified Before Liquidation

Prior to the MTF position being liquidated, you will receive notifications via SMS, email, and also in-app platform alerts, as per your specific terms with the broker. You will be given a particular timeframe to meet the margin call to cover shortfalls. It is in accordance with the broker's policy, but it usually takes 5 working days. Multiple alerts may be issued with the shortfall continuing to breach multiple thresholds internally. 

Impact of Liquidation on Your Holdings and Account

Here is the impact of liquidation on your account and holdings in most cases: 

• Forced sale of your pledged stocks 
• Losing control over when the assets are sold (may lead to unfavourable prices and losses)
• Unpledged shares and other securities will be secured in demat accounts
• Zero corporate action-related benefits in case of liquidation before the record date
• If the proceeds from the sale do not cover the total outstanding dues (including the loan amount, penalties, and interest), your trading account will reflect a debit balance that you should settle with your broker.
• The MTF system and the whole trading account may be closed upon the settlement of dues.

Preventing Liquidation: Best Practices

Here are some best practices to combat liquidation: 

• Do not use the maximum leverage from the broker whenever it is available. Use it carefully and maintain a level that you can manage with your own capital. 
• Set and use stop-loss orders strategically to limit potential losses and prevent escalation towards complete liquidation.
• Maintain extra collateral/cash in the trading account beyond the minimum margin requirement as a cushion for sudden scenarios. 
• Keep tracking your margin status and daily holding performance, even if you’re not trading.
• Meet margin calls promptly and trade in fundamentally robust, highly liquid stocks. 
• Spread the margin across multiple kinds of stocks to diversify and reduce risks, while factoring in the interest costs of the MTF. 
• Be aware of the broker's terms and conditions, including interest rates, liquidation triggers, and haircut percentages.

Rebuilding Your Position Post-Liquidation

Here are some ways in which you can rebuild your position after liquidation: 

• Check the margin statements and transaction history to confirm liquidation details, including the stocks sold, prices, and remaining balances/debits. Clear any outstanding debts and restore MTF access. 
• Review the broker’s liquidation triggers and margin call thresholds carefully, and base the position size on your stop-loss levels and risk appetite (without using the maximum available leverage). 
• Keep tracking the account regularly and ensure you have extra cash or collateral available in the trading account. 
• In case a stock is nearing any liquidation trigger, or there’s any upcoming deadline for a corporate action (like a stock split), you may convert your MTF position into delivery with payment of the full amount. This also eliminates the risk of liquidation.

Conclusion

As you can see, several triggers may prompt brokers to liquidate your MTF holdings. You should understand them carefully before availing this facility, while avoiding overleveraging as much as possible.