SEBI encourages leveraging to bring back retail participation in F&O
Moneylife Digital Team 08 July 2010

The capital market regulator’s move to cut exposure margins in equity derivatives is a revisit to the pre-crisis days of leveraging and speculation

In a throwback to the pre-crisis period of 2007-08, when excessive leveraging and speculative activities were at their peak, market watchdog Securities and Exchange Board of India (SEBI) has once again sought to encourage risk-taking even by retail participants in the equity derivatives segment. In order to give a leg-up to the falling volumes in this segment, the regulator has slashed the exposure margin requirement on futures and options (F&O) trading by half.

SEBI has been forced to take this step as the recent uncertainty and volatility in the stock markets has seen investors shunning over-exposure to equities and seeking a safe haven in money-market instruments and debt-oriented funds. Intraday volumes of derivatives contracts on bourses have taken a beating as investors prefer to stay away from the see-sawing markets. With the markets moving in a tight range for a while, traders are also finding it difficult to exit their positions quickly. For the month of June 2010, the total number of contracts in futures and options on the largest stock exchange, the National Stock Exchange (NSE) was 77,078,089. Comparatively, the volumes were better during the month of May, which saw 80,960,515 contracts being traded. Average daily turnover has also reduced from Rs101,166 crore to Rs92,527 crore during this period. Since April 2010, a total of 216,269,174 F&O contracts have been traded on the NSE.

Admitting that investor confidence is a bit shaky, Monal Desai, VP and head – institutional equities (derivatives), Prabhudas Lilladher, said that the markets need to stabilise for this move to work out. “It is a welcome step from the regulator. Exposure margin was over and above the SPAN margin. It was an exchange levy just to safeguard the bourses from any default scenario. But for this move to work, markets have to stabilise first. Markets have been see-sawing so badly that retail investors have been affected. Markets have to settle down and there has to be a clear direction as to where we are headed. Even institutional investors have been hurt by this market. Stocks which look good on one day, get crushed the next day. So the confidence level is pretty much shaken.”

Sandeep Singhal, co-head, institutional equities (derivatives), Emkay Global Financial Services, believes that this move will not enthuse retail investors too much. “The margin level never really affects investor participation too much when there is a money-making opportunity. So it won’t have a significant impact. What it will do is reduce the capital adequacy requirement for brokers. To that extent, capital will get released from the system.” Alex Mathews, head-research at Geojit BNP Paribas feels that this move will boost daily volumes by bringing more investors to this segment and enable them to take bigger positions. But at the same time, he believes that it won’t lead to an excessive leverage situation as the SPAN margin covers 16 different worst-market scenarios that can occur in one day.

The last time SEBI had revised exposure margins was in October 2008, in the middle of the financial crisis, when the regulator had to step in to calm down a highly volatile market. SEBI had then raised the exposure margin requirement on F&O trading from 5% to 10%, in an effort to clamp down on speculative trading and also to discourage investors from exposing themselves to this segment. “That was the time when the market needed safety. It was a prudent action on the part of the regulator when it increased the margin requirement as the systemic risk was much higher,” said Mr Singhal.

A little more than two-and-a-half years since, the regulator has brought the markets back to the earlier level and now wants investors to dabble a bit more in equity derivatives. Hopefully, the regulator would have learnt a lesson or two from the financial crisis and done its homework before encouraging higher exposure to derivatives.

“Actually it (the margin) was not required. They have put it unnecessarily but it’s a good step. Even 5% margin is not required. The brokers and client’s capital was getting blocked unnecessarily. So client’s capital will not be blocked now,” said Deena Mehta, managing director, Asit C Mehta Investment Intermediates.

sunil kharb
1 decade ago
what are changes occur in F&O market since feb 2008
1 decade ago
SEBI's C B Bhave has practically destroyed investing in indian financial markets.

He is using one set of his SO CALLED PRICIPLES for MF brokers/mf investors

in case of stock brokers/investors he is completely going OPPOSITE to HIS SO CALLED PRINCIPLES

1 decade ago
It is day light clear that Mr Bhave is a ''sold out man'' to some vested interests of exchange brokers-on one hand he is heavy on MF industry which has least churning in compare to terminals-and on other hand he encouraging more and more gambling and churning on exchanges to benifit exchange brokers and depositeries-
This man is surely a corrupt man who trying to benifit some elite by sacrifycing retail investors-it is sure if CBI raids SEBI office and tapes the telefonic talks of this man-lot of skeletons are going to come out-
Replied to DK comment 1 decade ago
I completely agree with DK. This is clear cut case of inviting more speculation on the bourses. More speculation means huge volumes which translates into more profit for the exchanges. The SEBI chariman should have cut down the entry load on MF instead of removing them completely.
Amalaraj Marian
1 decade ago
I am not impressed at all Mr. Bhave. Why rob Paul to pay Peter? By trying to get more retail participation what you are creating is a field for mass execution where retail participants will be massacared by the larger participants. Instead of advocating the principles of investing and holding for the investment to fruitify the Warren Buffet way you are Advocating the method which took the entire world down and left every one with bad memories of lost wealth.
Please think rationally Mr Bhave.
1 decade ago
SEBI is DON of legal gambling allowed by goverment-to just make retail investors loose money and make the operators bigger and richer-retail investor never knows that his all positions are well ''observed''by operator camp-and these operators change their positions opposite to retail positions-just like VARLI-MATKA wale satta khilate hai-so
just play this legal VARLI-MATKA and loose your hars earned money.
Free Helpline
Legal Credit