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Changes to margin rules by Sebi have impacted trading volumes across asset classes over the past few months. While the move is aimed at preventing brokers from providing excessive leverage to traders, limiting risk and protecting retail investors, margin funding is an important tool for smaller brokers and some market participants say further tightening of the norms may hurt pockets such as commodity derivatives more.
Last year, Sebi decided to make upfront margin collection mandatory to discourage brokers from providing excessive discretionary leverage to their clients. The first phase of the new rules came into effect on December 1, when it was made mandatory for members to collect upfront margins from investors, failing to do which would attract a penalty. Exchanges were also asked to collect maximum margin from clients based on intraday checks in contrast to end-of-day monitoring being done previously.
From March 1, 2021, Sebi hiked the upfront margin requirement to 50 per cent from 25 per cent, which brokers say has impact volumes in commodity derivatives more than those in equity derivatives, which continue to grow. Also, a rise in volumes is seen in the options segment as well. In the next two phases, Sebi plans to take this limit to 75 per cent by the end of August and then 100 per cent by September.
In effect, come September 1, the upfront margin requirement will double from current levels, which market participants are staring at, as it might further dent trading volumes. Sebi is making stockbrokers not only calculate margins based on the end-of-the-day position, but also on intraday peak position.
Sebi’s peak margin system aims to put an end to leveraging, though in a phased manner. Brokers says leveraging is essential for the capital markets to thrive and it caters to the interest of investors.
The hike in upfront margin requirements has had mixed impact on equities and commodities, with intraday cash volumes getting hit to some extent though derivatives remain broadly unaffected, brokerage
said in a report.
For instance, NSE’s average daily trading volume (ADTV) in derivatives jumped to Rs 44.4 lakh crore in March from Rs 30.6 lakh crore in December, amid strong growth in options. During this period, MCX’s ADTV came down to Rs 27,800 crore from Rs 36,800 crore, with a month-on-month drop of 24 per cent in March.
Higher upfront margin requirements will necessitate varied degrees of upfront cash payment depending on the underlying value. Based on margin requirements, if a trader intends to trade in the cash market, stock futures, index futures or commodity futures, the average margin requirement would be Rs 1.6-2.5 lakh for an underlying value of Rs 8-10 lakh, which on average accounts for 20-35 per cent of the underlying, the brokerage said. It said high-value items like gold have a higher absolute margin (Rs 3.5 lakh for an underlying value of Rs 46 lakh, which is 7.5 per cent of the underlying), ICICI Securities said.
“Discount brokers have indicated some volume shift from cash to derivatives due to the margin impact. However, the biggest impact was in commodities,” the brokerage said.
“We attribute the drop in volumes partially to margin-related changes and also equity performance with intraday commodity players also moving to the equity market… Peak margin remains an issue that both the government and regulators need to look at,” said Narinder Wadhwa, President of Commodity Participants Association, the apex body of commodity market participants in the country.
“Members should be allowed to give at least two times leverage (50 per cent upfront margin),” he said, adding: “We can still save the market… When it will be one time (phase four), liquidity will take a further blow.”
Wadhwa said volumes are expected to take a further hit in commodity derivatives going forward,.
Others, however, said while volumes may be affected in the short term, the greater transparency brought in by regulators will strengthen the market and work in the interest of investors.
“By putting a ceiling on leverage, Sebi has created a uniform and equitable system for brokers. The Sebi norms may bring short-term pains, but long-term rewards by making the stock market, brokerages and trading an efficient and fair system,” said NS Ramaswamy, Head of Commodities, Ventura Securities.
Commodity market participants sought government intervention in the matter earlier this month, as liquidity shrank in commodity exchanges. “Changes in the first two phases have served the purpose of stopping investors from entering the market on too much leverage, and regulators can stop it here (Phase 2),” Wadhwa said.
Others say the actual impact of Sebi’s new margin rules on volumes, especially in commodity derivatives, will be known only when the final phase is implemented.
In some cases, volumes may shift to other low-ticket items. It remains to be seen how trade volumes react to different margins of various products, ICICI Securities said.