Margin trading through the stock exchange model seems to have found favour among the broking community, especially since the proposal implies having the clearing corporation or the exchange acting as the financier to the purchase deals on margin.

However, the exchange would not actually provide the funds, but will only be an intermediary in the transaction between the actual financier and the clients.

Thus, the exchange will bear the counterparty risk. The actual financing can be done either by banks, financial institutions or even private institutions.

Motilal Oswal, chairman and managing director, Motilal Oswal Securities told Business Standard, "The exchange-traded model, being screen-based, is more transparent as both the lenders and buyers are known." Further, the exchange itself is the counter party to the transaction, making it a safer option.

The model also seems to have found favour among market participants on grounds that the securities will be kept with the exchange or the clearing corporation.

"The system is much similar to earlier vyaj badla system operated on the exchanges," a Mumbai-based broker said.

But the secondary market department of the Securities and Exchange Board of India seems be divided on this model.

In a recent discussion paper, majority of the members felt that this model was not safe especially for the exchange as it would amount to a banking mechanism, which may not find favour with the Reserve Bank of India.

On the other hand, a section of the members of committee were of the view that it is a better model on the grounds that it would facilitate wider participation by ordinary investors.

They feel this model is the most efficient model and risks are manageable.

Meanwhile, the broker-financed model which is being advocated by the committee is non-transparent, the broker lobby has said.

"Proper reporting is not possible as the total positions taken by the brokers would not be known," Jayesh Mehta, a dealer with a local brokerage house added.

It may be recalled that several brokers had duped investors without proper contracts notes during the March 2001 crisis.

On the other hand, the exchange-traded model assumes that banks and financial institutions will be comfortable financing brokers and clients through the clearing corporation or the exchange.

This business model needs the support of the clearing corporation of the exchange and must be willing to be an intermediary between the clients, brokers and the financing banks or financial institutions.

This model basically bridges a gap between the financiers and the borrowers in the securities market.

Moreover, lending of the funds through the online trading platform created by the exchanges allows for a market-determined rate for securities transactions.

Further, the returns on the lending are not linked to the price of the scrip financed.

Under the broker-financing model, brokers are the prime financiers to their clients on the purchase transactions.

A client interested in margin trading signs an agreement with the broker.

This agreement broadly provides for the margins, collateral and the rights of the lender, especially in case of default by the client on margin payments.

The brokers finance the client's deals either with their own money or the money arranged from other sources. The credit risk is borne by the brokers and they manage their risk by keeping the securities received from the purchase transaction of clients, as collateral.

Further, as the settlement in the market has already taken place against the trade of the client, there is no settlement risk in the system.