‘The leverage of 40 to 50 times in F&O trades will reduce to 4 to 5 times from December’

Lokeshwarri SK Chennai | Updated on November 24, 2020 Published on November 24, 2020

B Gopkumar of Axis Securities thinks that SEBI’s new norms, while good for the market, will shrink F&O volume by 40%

Equity markets have been on a roll since April and investors have been raking in the moolah. But a shift is expected from December in derivatives trading on Indian stock exchanges, once SEBI’s rules on collection of upfront margins and reporting of intra-day peak margin, begins, says B Gopkumar, Managing Director & Chief Executive Officer, Axis Securities. Excerpts:

The indices are again close to their January peaks. What is your view on how far this rally can continue?

There is enough liquidity in the market now. Foreign portfolio flows have improved and a lot of retail and HNI money is coming in to the market. Second, market should do well because post-lockdown, many companies have been rerated and this has been corroborated by the Q2 performance of companies, especially large-cap companies. The unlock theme is playing out well.

RIL may have taken the market up 1,000 to 1,200 points, but of late the rally has become broad-based with most sectors participating. BFSI, which was not doing too well has also picked up. Value stocks have done well so far, and now growth stocks should also begin to deliver. Things should begin to look better from hereon from India’s perspective.

What are clients doing now? Are they mainly trading or also seem to be buying from a long-term perspective, taking delivery?

Among our customers, we see both retail and HNIs building portfolios and delivery volumes going up, as opposed to intra-day trades. In the first three months of the lockdown, they were looking only at large-caps, but now they are looking at mid-cap stocks as well. That’s why the breadth has become more broad-based.

Yes, during lockdown there were many younger clients doing F&O trades, but our focus is not on that section. From an HNI perspective, the allocation to equity has gone up, either through direct equity or mutual funds.

Also read: Seeing a mix of pent-up and festive demand, says Sumit Bali of Axis Bank

Many brokerages reported increase in new client additions since this April. What has been your experience? How many new clients were acquired in this period?

Compared to last year, we have grown 300 times in terms of client acquisition in the first six months of FY21. We did a couple of things right during the lockdown. Firstly, we got our digital journey right; the customers were able to start trading digitally quite smoothly. Secondly, being a bank-led broker, the trust investors have in the lineage of Axis Bank helped us in expanding our client base.

The percentage of clients under 30 years of age has now increased to almost 45 to 50 per cent of our total accounts. Also, active accounts have grown by about 100 per cent, clearly indicating that there is an improvement in participation.

In our experience, the reports that clients have been chasing penny stocks and buying small-cap stocks are not true. Most of our customers have been buying quality stocks based on the thematic baskets recommended by us based on their financial goals.

Do you think low-cost or discount brokers have an edge over traditional brokers? How do your transaction costs compare with low-cost brokerages?

We are a full-fledged brokerage and have no intention of becoming a discount brokerage. This is because a large portion of customers come from the bank. These customers avail other banking services, besides broking service. So, we want to remain a full-service brokerage and don’t want these customers to do F&O trading due to the risks involved. Most clients doing derivative trading don’t know what they are getting into. We are here to build value for customers, and full-service brokerage is what we want to do.

We have a hybrid model where we are able to offer competitive transaction cost to a savvy customer who wants to do F&O. But for retail customers, we offer full service.

Post-December, once SEBI’s new regulation on margins kicks-in, F&O volumes are going to reduce drastically. Discount brokers can find it quite difficult then as the compliance arbitrage for discount brokers will go away then. Globally, discount broking works mainly in the ETF market where there is not much leverage. Here, we are offering discount broking on F&O products with high leverage, which is extremely risky.

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Hasn’t the requirement for submitting upfront margins always been there in F&O trades?

That’s where the catch is. In F&O, the rules were interpreted to mean that only for positions that are carried over, upfront margins are needed; for intra-day trading, upfront margins are not needed. The leverage of 30 to 40 times that people are getting now, will go away completely from December. Brokers can offer only four to five times leverage, as specified by the exchanges. Every three hours, exchanges have to give a peak margin report, which will show whether the margins have been collected or not.

As of now, 99 per cent of retail trades in F&O is done intraday. It’s like roulette is on out there. Almost 40 per cent of trades in F&O are due to this excess leverage, this can be affected post-December.

There is now talk about moving to T+1 settlement in cash. What’s your view on that?

I don’t think any domestic broker will have a problem with that as we are almost in that regime; if this is implemented, I can give same-day exposure to customers. There are some issues with custodians of FPIs. I think they are working on it. It can become a reality.

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Published on November 24, 2020
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