Volumes in F&O segment to shrink as peak margin rules kick in today

 

Zerodha expects F&O volumes to be impacted by 20-30%; new norms aimed at discouraging leveraged bets

Volumes in the futures and options (F&O) segment are expected to shrink by a third in the coming months as the new peak margin norms come into effect from Tuesday. The F&O segment contributes about 90 per cent to the overall market volumes, nearly half of which is intra-day and heavily reliant on excess leverage.

The maximum intra-day leverage that can be offered by a broker will now be restricted and will keep reducing until September 1, 2021. After this, a broker can provide maximum leverage that is equal to SPAN+exposure for the F&O segment and VaR+ELM (minimum 20 per cent) for the cash segment.

SPAN is standard portfolio analysis of risk, VAR is value at risk, and ELM is extreme risk margin — metrics used to determine the risk to investment for a particular security.

“As leverages decrease, F&O volumes are likely to take a hit. At Zerodha, we expect volumes to be impacted by 20-30 per cent in the coming months. Brokerages that were aggressive in doling out intra-day leverages will be impacted the most,” said Nithin Kamath, CEO, Zerodha, the country’s largest broker by active clients.

So far, brokers only reported margins at the end of the day, which is why they were able to give additional leverage even if the client didn’t have minimum margins. This was on the condition that the position will be squared off before the end of the day. Going forward, there will be a short-margin penalty if brokers fail to secure the minimum margin for intra-day positions.

“Sebi (Securities and Exchange Board of India) has effectively capped the exposure that’s possible in derivatives to 4 times margin in phase 1. And this will impact retail options volumes, especially for options writers on expiry days, which account for large volumes on the last Thursday of every month,” said Sandip Raichura, CEO (retail), Prabhudas Lilladher.