The retail derivatives volume is expected to fall further by 20 to 30 per cent as the second phase of margin rules is going to come into effect from March 1.
Retail participation in F&O (especially of options writers on expiry day) has already been affected by these rules, which came into effect from 1 December. On the NSE in December, derivatives trading on the index expiry on the weekly expiry was down 41 per cent from a month earlier, while it declined 19 per cent in index options. This information came from the brokerage firm Prabhudas Leeladhar.
Peak margin rules provide for penalties for margin reduction, ranging from 0.5 to 5 per cent of this reduction if the broker fails to achieve a minimum margin for the intraday position.
In the first phase, market regulator Sebi has set a limit to take positions in derivatives up to four times the margin. If the margin is less than 25 percent, then the penalty will be imposed and the penalty will be at least 20 percent of the trade value. From March 1, fines will be imposed when the margin is blocked at less than 50 percent of the minimum margin. The maximum margin offered by a broker in intraday will decrease until 1 September 2021. The broker will then be able to provide a maximum leverage equivalent to the standard portfolio of risk in F&O. Also, in cash it will be equal to Value at Risk and Extreme Risk Margin.
“We will not have a direct impact till February 2021 because the leverage we are offering will not change,” said Nitin Kamat, CEO of Zerodha. But after that, especially intraday leverage will be completely over by September 2021. Our intraday business will be affected by at least 30-40 per cent, which means that there will be a shock of around 20 to 30 per cent on total revenue.
F&O contributes about 40 to 60 percent of retail brokers’ revenue.
On 9 February, the stock exchange NSE warned brokers not to enter into an agreement with NBFCs to meet peak margin requirements for their clients. The exchange had said that trading members should not provide funding to their clients for any secondary market transactions or margin requirements, unless it is in accordance with regulatory provisions. This will impact the broker for funding clients.
Total derivative volumes rose to record highs in the last three months, while the peak margin regulations are in force and averaged Rs 38 lakh crore, up from Rs 20 lakh crore in 2020.
Till December last year, brokers offered 4 to 8 times leverage for intraday trading in F&O and it was also 30 to 40 times.