RBI's margin funding rules may cut options volumes by up to 20% in FY28: Report
New Delhi, July 17
India's stock exchanges continue to benefit from strong operating leverage and expanding revenue streams, although recent margin funding regulations could weigh on proprietary trading volumes with average daily turnover in options expected to decline by up to 20 per cent in FY28, according to Dolat Capital.
According to the report, the exchanges have recorded strong profitability growth over the past few years, mainly driven by a sharp rise in index options trading volumes. Additionally, the exchanges have benefited from strong operating leverage while diversifying revenue streams through businesses such as colocation, clearing services and mutual fund transactions.
However, the Reserve Bank of India's (RBI) recent regulations restricting leverage through bank guarantees (BGs) could dampen proprietary trading activity. It added that the alternative funding route through commercial papers (CPs) is significantly more expensive--around 11 per cent compared with about 1 per cent for BGs--making such trading strategies less viable and potentially reducing participation from proprietary traders.
"We expect a decline in volumes from our base case estimates across exchanges based on the proprietary book contribution and the exposure to bank guarantees," it said in its report.
It noted proprietary traders, including high-frequency trading (HFT) firms, account for over 45 per cent of trading volumes in NSE's index options, which contribute about 53 per cent of the exchange's revenue, and around 28 per cent of stock futures volumes.
Factoring in the impact of the new regulations, Dolat Capital expects average daily turnover (ADTO) in options to decline by 8 per cent in FY27 and 18 per cent in FY28, while futures volumes could fall by 3 per cent and 6 per cent, respectively.
"We are building in 8%/18% decline in ADTO's from our base case ADTO estimates for options and 3%/6% for futures, for FY27E/FY28E," it noted.
The report said proprietary traders, including high-frequency trading (HFT) firms, account for more than 50 per cent of BSE's index options trading volumes, which contribute around 60 per cent of the exchange's revenue. "We are building in a 10%/20% decline in ADTO's from our base case ADTO estimates for index options for FY27E/FY28E," it said.
— ANI
Reader Comments
I'm worried about this. Proprietary traders and HFT firms provide liquidity to the market. If volumes drop 20%, spreads will widen and the retail investor like me will end up paying more for every trade. The report says they expect 8-18% decline in options ADTO - that's massive for market efficiency. Hope the RBI and SEBI coordinate better next time.
The 11% vs 1% funding cost difference is shocking! Bank guarantees at 1% vs commercial papers at 11%? That's daylight robbery by the CP market. The real issue here isn't the RBI's regulation, but the fact that alternative funding is 11 times more expensive. Why can't the government make CP rates more competitive? This will hurt the entire proprietary trading ecosystem.
A much-needed correction. I've seen friends in my colony jump headfirst into options trading without understanding basic risk management, thinking it's a quick way to make money. The RBI is finally cracking down on excessive leverage that was propping up speculative volumes. Let the market cool down. The 18-20% decline in FY28 is actually healthy for long-term stability.
Interesting analysis from Dolat Capital. The report highlights that index options contribute 53% of NSE's revenue and 60% of BSE's. If volumes drop 20% on BSE, that's going to hit their bottom line significantly. The exchanges will probably need to diversify faster into colocation and clearing services as mentioned in the first paragraph. Smart investors should watch exchange stocks closely.
T Tanya I Arrey yaar, this is We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.