Market regulator Sebi’s revised equity index derivatives framework, announced on October 1, is expected to hit transaction volumes in the futures and options segment, ultimately impacting revenue and profitability of brokerages, especially discount brokers on one hand and on the other the revised transaction charges will directly trim their profits, warns a report.
For many brokers, derivatives account for 95% of their volume, in line with market trends. However, the extent of impact will vary based on business model–being a discount or full-service brokers. While discount borkers are set to see at least 25% dip in their pretax profit,full service ones may find it easier to go with 10% fall in pre-tax profit, as per a Crisil analysis.
The Sebi blow came in on the heels of stock exchanges had revised their transaction charges from September 27, which will impact profitability, especially of discount brokers.
On their part, brokers are revamping their revenue and cost models to mitigate the impact of these new norms. However, their ability to fully do so would be constrained by severe competition. In general, operational and compliance intensity will increase for the sector, the report wared.
Sebi has introduced a slew of measures on derivatives trading, with a three-pronged intent. One, raising entry barriers for transacting in derivatives for the retail who have been heavily losing money yet continuing to trade, by hiking the contract sizes and mandating upfront premium collections from buyers.
Two, curbing market volatility due to speculative activity close to expiry dates by limiting weekly index derivatives offered by exchanges to one each and removing the margin benefit available on offsetting positions across different expiries on the expiry day.
The third blow is controlling and building a cushion for risks by mandating intraday monitoring of position limits and requiring additional margins on short options contracts on the expiry day.
According to Subha Sri Narayanan, a director with the agency, the revenue contribution from derivatives is the highest for discount brokers at 60-80 percent. On the other hand, revenue contribution is relatively lower at 10-30 percent for full-service brokers due to their diversified revenue profile.
With a relatively low proportion of other revenue streams currently and the more stringent eligibility criteria for retail customers now, discount brokers, who cater predominantly to the retail segment, can see the largest impact, with new customer acquisition also slowing.
Proprietary traders will not be insulated from the effect of the expected drop in derivatives volumes either.
Discount brokers are also likely to be the most impacted by the revised transaction charge structure. From October 1 a uniform transaction charge for each category of trade has replaced volume-based slab-wise charges.