New margin norms: F&O turnover at record high in December, shows data

Retail participation slides 15-20% on weekly expiry days

The overall derivatives turnover on the exchanges this month touched a record high amid a surge in volatility and greater institutional participation, especially from overseas investors.

The daily average turnover in the F&O (futures & options) segment for December stood at Rs 31.44 trillion, a 2.6 per cent gain over the previous month and 58 per cent higher than the average turnover clocked for the entire year, the exchange data showed.

The month was characterised by wild swings, with gains of 8 per cent for the benchmark indices. Easy liquidity led foreign portfolio investors (FPIs) to purchase stocks worth Rs 51,120 crore, even as domestic institutional investors (DIIs) offloaded shares worth Rs 36,448 crore until December 29, the data compiled by BS Research Bureau showed.

“December has seen increased institutional participation and a lot of volatility, the key driver of higher F&O turnover,” said B Gopkumar, CEO, Axis Securities. He noted that higher F&O turnover typically increases the chance of investors losing money and is negative in the long run.

Retail participation in the F&O segment, however, has been affected owing to the peak margin norms, which became effective from December 1. The derivatives turnover on weekly expiry days on the NSE in December in the index futures segment came off 41 per cent over the previous month, while that for index options reduced 19 per cent, the data collated from brokerage Prabhudas Lilladher showed.

According to the new norms, a short-margin penalty is levied if brokers fail to secure the minimum margin for intraday positions. Sebi has effectively capped the exposure that’s possible in derivatives to 4x margin in Phase 1. This has impacted retail options volumes, especially for options writers on expiry days, which account for large volumes on the last Thursday of every month.

“The impact will become more pronounced as we move to the third phase of the margin norms in June. We expect another 30-40 per cent drop in the retail trading turnover in the F&O segment on weekly expiry days,” said Sandip Raichura, CEO-retail, Prabhudas Lilladher. “The markets would eventually adjust to the new normal in a few months, even as brokers’ risk exposure comes down.”

From June 1, brokers have to collect a minimum margin of 75 per cent of the prescribed limit as opposed to 25 per cent at present. This will increase to 100 per cent from September 1.  

The F&O segment contributes about 40-60 per cent to revenues of retail brokers, which can translate into a 10-15 per cent hit for brokers in the December quarter, according to industry players. Earlier, brokers typically offered leverage of 4-8x for intraday trading in the F&O segment, which could go as high as 30-40x.

The maximum intraday leverage that can be offered by a broker 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.

According to Raichura, volumes from derivatives for stocks -- especially the better quality ones where margins in cash are lower than in derivatives -- may move to the cash segment and provide some kind of balance to the overall turnover.

Delivery percentage showed a year-end rise and was at 39 per cent in the last two months, the highest since April 2019, the data showed.