SEBON Charts Course for Modernization: Intraday Trading Set to Transform Nepal's Stock Market

The Nepal Stock Exchange (NEPSE) is on the cusp of a significant transformation, as the Securities Board of Nepal (SEBON) has unveiled a comprehensive concept paper for the introduction of intraday trading in the country's secondary market. This landmark initiative is a pivotal step towards modernizing, enhancing competitiveness, and aligning the Nepali capital market with international standards. The move is a direct outcome of the 'Capital Market Strengthening and Revival Action Plan, 2083' issued by the Ministry of Finance and is a key agenda item in SEBON's current fiscal year policy and programs. The 'Concept Paper on the Implementation of Intraday Trading of Securities in Nepal, 2083' has been released for public consultation, inviting feedback from stakeholders and investors alike.

Currently, Nepal's stock market operates predominantly on a delivery-based trading system, where actual ownership transfer occurs only after a stipulated settlement cycle, typically T+2. This means investors must hold shares for at least two business days before they are officially registered in their demat accounts. The introduction of intraday trading will fundamentally alter this dynamic, allowing investors to buy and sell shares within the same trading day, thereby squaring off their positions before market close. This innovative mechanism is expected to usher in a new era of market efficiency, promising increased liquidity, more effective price discovery, reduced transaction costs, and significantly boosted investor participation.

SEBON's proposal outlines a phased implementation strategy, carefully considering Nepal's existing market structure, technological infrastructure, and risk management capabilities. In the initial phase, investors will be permitted to engage in a 'Buy First, Sell Later' model. Under this framework, an investor can purchase shares after the market opens and then sell them before the market closes on the same day, managing their profits or losses within that single trading session. This cautious approach is designed to allow market participants to gradually adapt to the new system while mitigating potential risks. The second phase, which will introduce the 'Sell First, Buy Later' or short-selling model, will only be implemented after the full development of the legal and technical infrastructure for Securities Lending and Borrowing (SLB) and covered short selling. This measured progression aims to prevent sudden systemic risks and facilitate the gradual integration of advanced trading tools into the market.

To safeguard market integrity and prevent undue price manipulation, not all listed companies will be immediately eligible for intraday trading. SEBON has proposed a 'Nepal Intraday Eligible Securities Framework.' This framework will prioritize companies demonstrating sufficient liquidity, consistent average daily trading value and volume, and a healthy free float of shares available to the public. Furthermore, companies with robust corporate governance practices and those that have not faced severe regulatory actions will be included in the initial list. Conversely, companies exhibiting excessive price volatility or low trading activity will be placed on a watch list and excluded from intraday eligibility. NEPSE and SEBON will conduct quarterly reviews to update the list of eligible securities, ensuring dynamic adaptation to market conditions.

Recognizing the inherently higher risk associated with intraday trading compared to traditional delivery-based transactions, investor protection has been accorded paramount importance. A 'Risk-Based Investor Eligibility Framework' has been proposed to ensure that only suitable investors participate. Prospective intraday traders will be required to possess an active Demat and trading account, updated Know Your Customer (KYC) details, a signed intraday agreement, and an accepted Risk Disclosure Statement. Moreover, stockbrokers will be mandated to conduct an initial suitability assessment of their clients' financial capacity, market knowledge, and risk-bearing ability before granting access to intraday facilities. This rigorous screening process underscores SEBON's commitment to fostering a responsible trading environment.

At the core of the intraday trading system lies the principle of 'Risk First, Trading Second.' To operationalize this, a 'Nepal Intraday Margin Framework' has been proposed. This framework will define various margin requirements, including Initial Margin, Maintenance Margin, Exposure Margin, and Peak Margin, which will be determined based on the volatility and liquidity of specific shares. During trading, if an investor's margin level falls below a predetermined threshold due to price fluctuations, the broker's Risk Management System (RMS) will automatically issue alerts and margin calls. Crucially, the intraday system will strictly prohibit any overnight open positions, eliminating overnight risk. If an investor fails to close their open positions within the stipulated time, the broker or NEPSE's system will automatically square off the position by buying or selling shares according to predefined rules. This auto square-off mechanism ensures that all trades are settled within the same day, preventing potential financial losses and default risks from carrying over to the next trading session.

The implementation of intraday trading will not necessitate the establishment of new institutions but rather involve the technological upgrade and systemic integration of existing market infrastructures. SEBON will assume the overarching role of regulation and supervision, formulating policies, bylaws, directives, and standards. NEPSE will be responsible for operating the intraday trading engine, automated order matching, order classification, and real-time market surveillance. CDSC and Clearing Limited will manage post-trade record reconciliation, Delivery versus Payment (DvP) coordination, and data updates. Stockbrokers will be tasked with real-time client margin monitoring, order management, and internal risk control mechanisms. Banks and financial institutions will also play a crucial role by providing technological coordination for immediate fund payments and margin management.

The Securities Act, 2063, provides the fundamental legal basis for the operation of intraday trading. Rather than extensive amendments to the Act, the focus will be on revising NEPSE's trading bylaws, developing Standard Operating Procedures (SOPs) for brokers, creating risk management guidelines, and establishing technical standards to ensure effective and organized implementation. A dedicated task force comprising representatives from SEBON, NEPSE, CDSC, and the Stock Broker Association has meticulously prepared this concept paper. The feedback and suggestions received during the public consultation period will be instrumental in finalizing the necessary regulations and directives. The formal launch of intraday trading in the Nepali capital market will only proceed after thorough technology testing, a pilot phase, and a comprehensive assessment of overall readiness, ensuring a smooth and secure transition. This initiative marks a significant leap forward for Nepal's financial landscape, promising a more dynamic and sophisticated trading environment for investors.