Leverage is the fuel that drives speculators forward, and any crackdown on leverage will lead to a drop in speculative activity. This is the trend in the commodities futures market with the phased implementation of SEBI’s maximum margin rules since December of last year.
Data from the Multi Commodity Exchange shows that since November 2020, the average daily turnover (ADT) of commodity futures has fallen 23% through April 30. A 50 percent peak margin requirement that started then.
The new rule is implemented in four stages from December 2020. Between December 2020 and February 2021, traders should have maintained at least 25 percent of the maximum margin. This requirement rose to 50% between March 2021 and May 2021. It rose to 75% between June 2021 and August 2021 and to 100% from September 1.
Maximum Margin is the maximum margin obligation of a market player at any given time and applies to both equity and commodity derivatives.
While the impact of a higher peak margin requirement is also visible in equity futures, commodity futures have taken a more severe hit as only a few commodities are actively traded and the spot market is far from dynamic. Higher margin requirements can put participants off and recent data suggests the same. But that’s not the only setback traders face.
The burden of the TTC
India’s transaction costs are among the highest in the world and the Commodity Transaction Tax (CTT) is a significant part of it, discouraging large participants like hedgers. Since the introduction of CTT in 2012, revenue has steadily declined over the years – from 148.9 lakh crore in 2012 to 87.3 lakh crore in 2020. Thus, margin requirements higher and higher costs have become a double whammy.
According to Narinder Wadhwa, President of the Indian Association of Commodity Participants, “If the third phase is implemented as planned in June, forward volumes will decrease further and impact costs will be higher. Once the cost of impact is higher, the volumes will slow down again as players will hesitate. “
However, higher margin requirements are not always bad as it can limit the amount of trades one can make, thus reducing potential losses, especially for new entrants.
Go to options
While ADT in the MCX futures segment declined 28% and 4% in March and April, respectively, options revenue climbed 47% and 13% in the corresponding months. . Additionally, ADT in the options segment has increased 22% since November.
In addition to the lower margin requirements, options have some advantages over futures contracts, such as lower brokerage and lower expenses.
“There is definitely a pull in options as the cost of carry and the transaction cost are quite low. But unless you have a deep and vibrant cash market in the underlying, it can’t go beyond a point, ”Wadhwa adds.
In addition, since the two derivative instruments have different characteristics and serve different strategies of speculators, this trend may not last.