Stockbrokers Brace For Impact As Regulator Tightens Index Derivative Framework
Icra says that the developments to induce brokers to recalibrate their revenue and pricing models
Talking about the securities broking industry, the rating agency Icra has said that stockbrokers brace for impact as regulator tightens the index derivative framework. It stated that the new directives aimed at market stability and investor protection are likely to curb speculative hypertrading activity in index derivatives.
A dip of about 30 per cent in derivative trading volumes cannot be ruled out; interest income earned from client funds could also be impacted to some extent. According to the Icra, developments to induce brokers to recalibrate their revenue and pricing models.
Given the concerns about market stability and losses incurred by individual investors amid a material increase in retail participation in index derivatives, on 01 October 2024, the Securities and Exchange Board of India (Sebi) introduced six measures to strengthen the equity index derivative framework for protecting market stability and enhancing investor protection.
The measures include rationalisation of weekly index derivatives, increase in their contract size, upfront collection of option premiums from buyers, increase in margins on expiry days, removal of calendar spread benefits on expiry days, and enhancing the monitoring of position limits. This follows the earlier consultation paper floated by the regulator in July 2024 on seven measures for promoting market stability.
Additionally, in a bid to enhance the protection of investors’ cash collaterals, SEBI mandated qualified stockbrokers (QSB) to offer a facility of trading supported by the blocked amount in the secondary market (cash segment) using the UPI block mechanism or the 3-in-1 trading facility, which was optional so far.
The proposed measures will be introduced in a phased manner between November 2024 and April 2025. With the combined effect of the aforesaid measures and the recent hike in security transaction tax in the F&O segment, in Icra's assessment a 30 per cent dip in F&O volumes cannot be ruled out.
The impact of the same would be more prominent for discount brokers since 70 to 80 per cent of their income comes from F&O brokerage. Many full stack brokers, on the other hand, with a more diversified revenue mix generate 10-20% of their income from F&O and, hence, would face a lower impact.
Further, meaningful adoption of a UPI block on secondary trades or a three-in-one trading account could also impact the interest income of stockbrokers. Considering these recent headwinds, stockbrokers would be required to recalibrate their business models, including upward revision in brokerage fees and a possible shift from brokerage-free products to maintain their profitability.
As per Icra’s assessment, ceteris paribus, a 25 per cent hike in F&O pricing could be required to materially offset any impact on F&O broking income.
