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Are margin norms hurting commodities more than equities?

As upfront margin requirement got hiked to 50% from 1st Mar’21, there has been mixed impact on equities and commodities. While intraday cash volumes have been hit to some extent, derivatives seem to be broadly unaffected. Discount brokers (e.g. Angel Broking) have indicated some volume shift from cash to derivatives due to the margin impact. However, the biggest impact is in commodities with MCX ADTV declining 24% in Mar’21 over Feb’21. ADTV declined by Rs90bn composed of Rs63bn due to change in volumes and Rs27bn due to change in prices. Higher upfront margin requirement will necessitate varied degrees of upfront cash depending on the underlying value, as a result of which one can expect the trades to move from high margin requirement segments (in absolute terms) to lower margin requirement (or ticket-size) items.

* Cash volumes have remained steady… Average NSE cash ADTV between Sep’20 and Feb’21 was Rs652bn, which includes the sharp surge seen in Jan’21 (Rs725bn) and Feb’21 (Rs825bn). NSE cash ADTV for Mar’21 / Apr’21-TD stood at Rs666bn / Rs653bn indicating that the impact of increased margin regulation on cash volumes has been marginal. Further, within the cash segment, retail ADTV has increased from Rs284bn in Dec’20 to Rs354bn in Feb’21, and retail mix in total cash turnover has remained steady (Mar’21 data awaited). NSE intraday cash ADTV has remained steady at ~Rs600bn (intraday cash ADTV is based on the value of shares traded).

* …while equity derivatives continue to witness strong growth… NSE’s derivative segment has witnessed robust growth between Dec’20 and Mar’21 driven by robust growth in options. Derivatives ADTV has risen from Rs30.6trn in Dec’20 to Rs44.4trn in Mar’21 and Rs45.4trn in Apr’21-TD. Though the retail mix in overall derivatives has been declining, retail derivatives ADTV has increased from Rs8.9trn in Dec’20 to Rs11.7trn in Feb’21.

* …and commodity derivatives have been hit: MCX reported a drop in its overall ADTV to Rs278bn from Rs296bn / Rs318bn / Rs368bn in Dec’20 / Jan’21 / Feb’21 / Mar’21 respectively. Mar’21 ADTV declined by Rs90bn led by sharp drop in volumes (by Rs63bn) and declining commodity prices (by Rs27bn). Apr’21-TD ADTV is also marginally lower at Rs273bn.

* Higher upfront margin requirement will necessitate varied degrees of upfront cash depending on the underlying value: Based on margin requirements, if a trader intends to trade into cash segment / stock futures / index futures / commodity futures, the average margin requirement stands Rs0.16mn-Rs0.25mn for an underlying value of Rs0.8mn-1mn, which on an average is 20-35% of the underlying. High-value items like gold has higher absolute margin (Rs0.35mn for an underlying value of Rs4.6mn, which is 7.5% of the underlying). In some cases, volumes may get shifted to other low-ticket items. For instance, in the case of MCX crude futures, where higher margin requirement led to fall in volumes, the overall ADTV didn’t get much impacted as natural gas and bullion saw sharp increase in volumes. Hence how the trade volumes react to different margins of various products remains to be seen. Also, discount broker Angel Broking indicated that there has been some shift from cash to derivatives due to the margin impact.

* Impact of peak margin regulation: Phase-2 of 50% of the upfront margin regulation got implemented w.e.f. 1 st Mar’21. Based on NSE data for Mar’21 and Apr’21-TD, we see moderation in volumes when we compare them with the Feb’21 levels. However, we believe that Feb’21 being an eventful month for markets (NIFTY up 5%), Mar’21 volumes were expected to moderate. But when we compare the same to Dec’20 levels (when phase-1 got implemented), volumes have moved higher. However, we remain in wait and watch mode to see how volumes pan out once phases-3&4 of 75% and 100% become applicable from Jun’21 and Sep’21 respectively

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