The impact of BSEC’s new margin rule on investor’s sentiment, market liquidity and volatility: a case study based on IDLC Investments Limited

Abstract

In this report, I have recorded my internship experience at the top merchant bank in Bangladesh, with the IDLC Investments Limited and critically analyzed how the capital market has responded to a major regulatory change, which is the implementation of the Bangladesh Securities and Exchange Commission (BSEC) Margin Rules, 2025. Limiting to a short-term transition phase between November 6 and December 6, 2025, the research will resort to a qualitative research methodology, i.e. the combination of the daily trading observations with the detailed interviews of the top management of the Operations and Risk departments, to assess the multi-dimensional effect of these new leverage constraints on the behavior of the market and the organizational workflow. According to the analysis, the transition was highly volatile, and the investor sentiment was dropping considerably. Small portfolios had a 1:0.5 lever cap, which a small investor was tempted to exceed due to a Gambler fallacy, but which was perceived as a punishment, not as a guarantee of protection, by retail investors, who were mainly unwilling to think about the long-term advantages of the new cash-basis calculation of interest. This has been aggravated by a liquidity crisis as strict Forced Sell triggers (50% equity) led to forced sell orders flooding the market with buyers withdrawing, putting investors in a one way only market. At the same time, IDLC Investments also encountered a colossal internal re-engineering of IT infrastructure to isolate Cash and Margins funds, and start dynamic risk monitoring to be able to comply on time. The report finally finds that though the Margin Rules 2025 are structurally needed to develop the immature Bangladesh frontier market and to limit excessive speculation, sudden adoption was harmful in the short term. The paper points out that immediate enforcement as shock therapy was not only unprofitable to the merchant banks in the short term, but also difficult on the relationships between the clients. To survive in such a tightening of the regulatory belt, the report suggests that IDLC Investments re-align its business model with High Net-Worth Individuals (HNWIs) and advisory business rather than the unsustainable, high-volume retail trading business which the new regulations effectively deter.