Higher derivatives lot size boosts margin-funding biz

The temporary client funding book of brokers has grown to about Rs 6,000 cr now from Rs 4,800 cr about 10 months ago

The temporary client margin-funding business offered by brokers has grown 25 per cent in the past 10 months as increase in the lot size of derivatives contracts has prompted retail (small) investors to shift to the cash market and borrow more.

According to industry estimates, the temporary client funding book has grown to about Rs 6,000 crore now from Rs 4,800 crore 10 months ago.

The derivatives contract size increased from Rs 2 lakh to Rs 5 lakh effective November 1, 2015. This has prompted investors who are unable to trade large contract values to shift to the cash segment. “The margin required for buying one lot of futures has gone up by roughly 2.5 times. Clients are overcoming this barrier by migrating to the cash market and utilising the margin-funding facility offered by brokers,” said Jimeet Modi, CEO of Samco, a discount broker.

FINANCING UP

• The temporary client funding book of brokers has grown to about Rs 6,000 crore now from Rs 4,800 crore about 10 months ago
   
• Temporary client funding involves short-term loans of 4-5 days, and are mostly availed of by retail investors facing a funding shortfall.
   
• Increase in the lot size of derivatives contracts has prompted retail investors to shift to the cash market and borrow more.
   
• The margin required for buying 1 lot of futures has gone up by roughly 2.5 times.
   
• Interest rates for temporary funding are 14-18 per cent based on stock quality and client relationship with broker
  

 

RBI’s move in 2014 to restrict lending by NBFCs to 50 per cent of loan to value of shares pledged has also indirectly benefited temporary client funding

According to experts, 20-30 per cent of the futures and options turnover comes from retail participants.

For example, earlier, one lot of Reliance Industries was roughly 200 shares and the purchase price for buying one lot came to Rs 2 lakh, assuming a price of Rs 1,000. If the margin required was 12.5 per cent, the investor had to pay Rs 25,000 to buy one lot. Now, one lot is about 500 shares, meaning the cost of purchasing one lot has risen to Rs 5 lakh and the investor has to shell out Rs 62,500 at 12.5 per cent margin. This means, someone with Rs 25,000 cannot initiate a futures trade.

If the same investor moves to the cash market and borrows at a 20 per cent margin, s/he can buy Reliance shares worth Rs 1.25 lakh with Rs 25,000.

Interest rates for temporary funding vary between 14 and 18 per cent per annum depending on the quality of stock invested in and the client relationship with the broker. “The minimum margin amount is based on the exchange VaR (Value at Risk), but brokers ask clients for additional margins over and above VaR margin as a precautionary risk management measure,” said Modi.

The VaR margin is collected upfront at the time of trade and is mostly intended to cover the largest loss that can be encountered on 99 per cent of the days.

The Reserve Bank of India’s move in 2014 to restrict lending by non-banking financial companies (NBFCs) to 50 per cent of the loan to value of shares pledged has also indirectly benefited temporary client funding. Experts say the 50 per cent requirement is on the higher side and has deterred several high net worth individuals from borrowing money through this route. The central bank had also said NBFCs could accept only Group 1 securities with an impact cost of one or less as collateral.

Temporary client funding involves short-term loans of four to five days, and are mostly availed of by retail investors facing a funding shortfall. NBFCs, on the other hand, lend for one to three years depending on the collateral placed.