Sebi’s new margin rules hitting commodities more than equities

Data from the Multi Commodity Exchange indicate that since November 2020, the average daily turnover (ADT) in commodities futures was down 23 per cent till April 30. March 2021 saw the sharpest fall of 28 per cent month-on-month, largely due to the 50 per cent peak margin requirement that kicked in then, the Hindu Business Line reported.

The reportage added that leverage is the fuel that keeps speculators going and any clampdown on leverage will result in lower speculative activity. This is the trend playing out in the commodity futures market with the stage-wise implementation of Sebi’s peak margin rules since December last year.

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 so 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 which was the norm 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, the Economic Times said.

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.

Peak margin is the maximum margin obligation of a market participant at any given time and applies to both equity and commodity derivatives.

While the impact of higher peak margin requirement is seen in equity futures as well, commodity futures has taken a bigger blow as only few commodities are actively traded, and the spot market is far from thriving. Higher margin needs can discourage participants and the recent data suggest the same. But that is not the only setback the traders face.

Transaction costs in India are among the highest in the world and the Commodity Transaction Tax (CTT) constitutes a major portion of this, discouraging big-ticket participants like hedgers. Since the introduction of the CTT in 2012, the turnover has seen a steady decline over the years – it has slumped from ₹148.9-lakh crore in 2012 to ₹87.3-lakh crore in 2020. Thus, higher margin requirements and higher costs have become a double blow.

However, higher margin requirements are not always bad because this can limit the amount of trading one can do, thereby reducing the potential losses, especially for new players.

While the ADT in futures segment on the MCX shrank by 28 per cent and 4 per cent in March and April, respectively, the turnover in options shot up by 47 per cent and 13 per cent in the corresponding months. Also, the ADT in the options segment has increased 22 per cent since November.

In addition to lower margin requirements, options hold some advantages over futures like lower brokerage and lower expenses. Also, given the fact that the two derivative instruments have different characteristics and serve different strategies of speculators, this trend may not last, the Hindu Business Line said.

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