Brokers fret as secondary market ASBA gains motion with new UPI feature

Blocking money via UPI may lead to 5% decline in float parked with brokers, they fear

A new payment mechanism for secondary market trades is expected to become a reality sooner than initial projections. This is furrowing the brows of brokers.

The proposal to introduce an application supported by blocked amount (ASBA) mechanism for the secondary market has been kicked into motion, with the Reserve Bank of India (RBI) approving critical tweaks to the Unified Payments Interface (UPI).

On December 7, the RBI announced the introduction of ‘single-block multiple debits’ functionality for UPI, facilitating the ASBA model for the secondary market for retail investors. Adding functionality to the UPI mechanism is expected to advance the timelines for the implementation of secondary-market ASBA, observe industry players.

Currently, ASBA is used primarily for initial public offering (IPO) payments, with nearly half the retail applications using this mode of payment.

Brokerages are staring at a potential 15-20 per cent fall in revenue they make from earning interest on the surplus funds parked with clients. A similar instance played out when ASBA was first introduced for IPOs.

Secondary market ASBA is expected to bring down the float parked with brokers and increase their cost of operations. The float is the capital clients keep with brokers for smooth transactions for trades. Many traditional brokers and discount brokers earn interest on this amount lying with them.

“The last quarterly one-time settlement showed an outflow of nearly Rs 30,000 crore. This was after retaining the margins and interest of about 2.5 per cent. Under the new mechanism, brokers may not even manage margins as they may be blocked in clients’ accounts or transferred to clearing corporations. The entire float that could go out of the system may be close to Rs 1 trillion,” says a member from the broker lobby.

However, industry players believe the secondary market ASBA can only be rolled out in phases as it would be much more complex than applying it for IPOs. The industry has warned of major technical challenges that could bog down implementation, specifically in derivatives and intraday trading where trading intensity is higher.

“The biggest question is who is going to underwrite the risk? The brokers provide margins for sudden fluctuations in intraday and derivatives market as exchanges allow trade only on 90 per cent of capital. Currently, the brokers’ risk mechanism takes care of mark-to-market square-offs,” says Jimeet Modi, group chief executive officer (CEO), Samco.

“When crude oil contracts slipped into negative during early Covid months, the broker community ended up facing an obligation of nearly Rs 250 crore which had to be borne by brokers independently. In ASBA, there is going to be no mechanism for such risk underwriting,” he adds.

In the initial phase, ASBA could be rolled out only for the cash segment, say industry players.

“Cash segment still contributes below 10 per cent to the overall volume. Derivatives or intraday are mostly leverage play. If an ASBA-like mechanism becomes mandatory for all secondary market trades, the business model of brokers will have to be calibrated around the revised requirements,” says Lav Chaturvedi, CEO, Reliance Securities.

Brokers may have to expand their revenue from ancillary services, such as leverage, margin funding, and research services. Industry players say that a daily block-and-debit mechanism for secondary market trades will build technical pressure on the system and clearing corporations, leading to further customer grievances.

A key difference between the secondary and primary market ASBA will be the frequency of trades.

“ASBA’s success in the primary market is also owed to the cycle of transactions which can be around four/five days or more. In the secondary market, the speed of trades and the settlement is quicker and many customers may not opt for such a mechanism here,” says a broker quoted earlier.

All set for a new model

• New UPI feature will integrate the ASBA model within the secondary market for retail investors
• Brokers expect the ASBA mechanism to be implemented only for cash segment in initial phase
• Nearly 15-20% revenue of brokers dependent on float amount
• Industry awaits clarity on risk underwriting, specifically in derivative and intraday segments, which contribute the majority of volume
• Ancillary services like leverage and margin funding research services could be calibrated to compensate for revenue
• Proposal to introduce ASBA has been kicked into motion with the RBI approving critical tweaks to the UPI