What is liquidation in MTF & When will it happen?

Liquidation is the process in which the excess stocks under Funded stocks will be moved from MTF to Normal segments. Let us understand some of the terms commonly used in MTF

a) Funded Stocks - The stocks bought under MTF are called Funded stocks

b) MTF debit - The total debit in MTF ledger is the MTF debit

c) MTF Collateral - This can be cash collateral or stock collateral. As the  name suggests, this is the amount that is brought in as a base with which funding is availed i.e, a stock collateral of 2 lakhs implies that with 2 lakhs positions can be taken for higher value in MTF

This is what will happen in liquidation

Scenario 1

The system constantly compares the MTF debit with the Funded stock value at CMP or Cost whichever is lower. The moment it finds the debit lower by Rupees 10000 against the funded stock value, it automatically does a process of moving stocks worth Rupees 10000 from Funded stock to your demat account as free stocks (this would have earlier been pledged stocks). Let us understand this with an example. Say you have a MTF debit of Rupees 25 lakhs and funded stock value for 25.5 lakhs. In this case, your ledger debit is 50000 lesser than the funded stocks that we hold against your debit. Hence, this amount need not be funded as there is no corresponding debit against this. The system therefore, does liquidation whereby stocks worth 50k will be released from MTF funded stock and released to your demat account as free stocks. This stock is now free from pledge and you may sell it under CNC segment itself the next time you would like to sell it.

Navia will liquidate the client positions on FIFO basis and within FIFO the security with the highest value will be liquidated first. 

Scenario 2

If there is any payout short for MTF purchase position the trades will then be transferred to normal. Eg--> A bought 10000 nos of 'X' stock and a pledge is created for all 10k nos. Let us assume that there was a short delivery from the Clearing Corporation on the payout date and we received only 9900 stocks instead of 10000. In such case, the entire trade will be moved to NSE CM segment and the shares will be sold on T+1 day to clear the debit in CM segment if any

Scenario 3

When the required margin of a stock increases to 100%. 

Exchange releases VAR margin on every stock on a continuous basis. In this process, there is a possibility of stocks moving from a 30% or 40% or any other % to 100% margin requirement. If that happens to a funded stock, it will then be liquidated from MTF. To understand better, let us take an example.

Let us assume that client 'A' bought stock 'X' and paid a MTF margin of 53%. There will be no issue as long as the MTF margin requirement stays within 100%. The moment the VAR of 'X' moves to 100%, it will move out of funded stock list and 'A' will be require to make full payment of the purchase value. The liquidation scenario will then arise as seen in the table below

DayMTF % of Margin RequirementStatus
Day 153%Continuous to be funded
Day 250%Continuous to be funded
Day 360%Continuous to be funded
Day 4
The stock needs to be liquidated out of MTF. 'A' has to make full payment of the purchase value of the stock

Scernario 4: Liquidation also happens as per margin call policy

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