Sebi mulls lowering cost of derivatives trading

Brokers said they could end up paying 30-35 per cent less in initial margins.
The Securities and Exchange Board of India (Sebi) is looking to revamp margins on derivatives trading to reduce costs for market participants, said two people aware of the development. The regulator will consider a single margin system that will help those who trade in futures and options to hedge their share portfolios. Brokers said they could end up paying 30-35 per cent less in initial margins and trading costs could drop 5-10 per cent for others, depending on the nature of their bets.
Sebi and stock exchange officials discussed the matter in the last week of October, the people said. Market participants have been lobbying for such a move on the grounds that margins in India are among the highest in the world. This is said to be one of the factors behind foreign portfolio investors (FPIs) preferring to trade Indian derivatives in offshore locations such as Singapore instead of on-shore.
The regulator didn’t respond to queries.
Derivative market traders currently pay two margins — standard portfolio analysis of risk (SPAN) and exposure. The first is an upfront margin that traders pay at the time of placing trades, a percentage of the value of the trades as calculated by the SPAN software. Exposure is an additional margin that brokers collect from their clients for trading in derivatives at the time of initiating a trade.
The regulator and the exchanges are looking at scrapping the second and retaining only SPAN, the people said. An increase in SPAN margins will partially offset this, benefiting hedged bets.
“If the proposal is implemented, several traders using hedging strategies will end up paying substantially lower margins since SPAN margin is calculated at a portfolio level,” said Chandan Taparia, derivatives analyst, Motilal Oswal Securities. The exposure margin, on the other hand, pertains to that particular trade. “This is a welcome step since such hedging strategies carry limited risk and hence would not be subjected to high margins,” Taparia said.
Brokers said a single margin structure will help individual traders bet on options trading strategies at lower cost.
“On Indian exchanges, retail traders don’t trade option strategies as the margin requirements make them non-viable even though the maximum risk is limited,” said Nithin Kamath, founder and CEO of Zerodha. “With the new proposed margins, we would be enabling retail to trade options through strategies, which have limited risks.”
The regulator had received several representations from industry bodies, including FPIs, to rationalise the margining system for the derivatives market. In the run-up to settlement, margins on some stocks surge as much as 100 per cent of the contract value whereas the global standard is 10-20 per cent.
“The idea of Sebi was to simplify the margining structure and also give some benefit to genuine traders who use derivatives for safety net purposes,” said one of the persons cited above. “However, Sebi is planning to tweak the existing calculation for SPAN margins by increasing the multiplier. This would mean SPAN margins could go higher in lieu of exposure margin.”
A single margin structure will help market participants allocate capital more efficiently.
“Until now, introducing a single margin wasn’t possible since BSE and NSE do it at the exchange level. However, with the introduction of interoperability before the clearing corporations, such a step has been made possible,” said a senior exchange official. “We have also represented to Sebi not to increase the SPAN margins substantially higher since an internal study done by us showed current SPAN margin calculation covers losses that could occur in 99 per cent of scenarios.”
However, those punting on highly volatile stocks are unlikely to get any relief from the scrapping of exposure margins, said the head of derivatives at a domestic brokerage.
“Such contracts are currently subject to more margins, including additional surveillance margins (ASM) and bonus margin for highly leveraged stocks,” the person said. “Our sense is that Sebi will continue to charge the additional margins on such counters.”
About 30-40 stocks are subject to additional margins. In October, Sebi proposed to impose 35 per cent higher margins on the contracts of companies where more than 25 per cent of the promoter shareholding is pledged. This impacted nine counters including Bajaj Consumer, Dish TV, Sadbhav Infrastructure and GMR Infrastructure.
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Nifty gives up gains after hitting 12,400

Nifty gives up gains after hitting 12,400
Oil prices rose to their highest in more than week.
HDFC Bank, TCS and Kotak Mahindra Bank were among the top losers.
Indian markets gave up most of their early gains after setting new highs in early trade. The Nifty hit 12,400 level for the first time when it rose 78 points to 12,430 at day’s high. The Sensex rose over 300 points when touched 42,273 in early trade. However, Sensex and Nifty later pared most of their early gains to turn flat as a surge in oil prices hurt the sentiment.
HDFC Bank, TCS and Kotak Mahindra Bank were among the top losers, down between 0.5% and 1%.
Crude has again raised its ugly head today with fresh issues cropping up in Iraq and Libya. The Nifty is discounting the solid results of RIL and other Nifty constituents, HDFC Securities said in a note.
Reliance Industries reported a 13.5% rise in quarterly net profit, led by strong performance of its consumer-facing businesses and robust refining margin. HDFC Bank reported a 32.8% growth in net profit year-on-year to Rs. 7,416.5 crore for the third quarter ended December 31 driven by interest and non-interest income.
Oil prices rose more than 1% today on supply concerns after exports from Libya, which has been riven by fighting between rival factions since a 2011 NATO-backed uprising, were blocked after a pipeline was shut down by armed forces.
And in Iraq, which is OPEC’s second biggest producer, a strike at a key oil field hit output.
Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services, says Nifty has major support at 12150 levels. On the flipside, resistance is placed in the zone of 12,450-12,500, he added.
Asian markets were mostly higher today as the mood remained optimistic after the last week’s signing of China-US trade pact. China’s GDP data, which was released on Friday, also provided some reassurance to traders, indicating a growth slowdown in the world’s number two economy may have bottomed out.
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With strong order flow, Tech Mahindra should sharpen its focus on execution

With strong order flow, Tech Mahindra should sharpen its focus on execution
Shares of Tech Mahindra Ltd saw a remarkable recovery in the last four months, in part fuelled by a sequential rebound in revenue growth in the September quarter.
At an analysts meeting on Monday, the company sounded confident about growth prospects. But currency volatility and transition costs related to recent large deals indicate that the management is less certain about profitability in the second half of the fiscal year.
Indeed, analysts have flagged concerns over the above-mentioned factors. “In FY20, margins are likely to be affected by transitional cost from the large telecom deal and sector specific challenges such as auto in manufacturing,” Nomura Research said in a note.
Tech Mahindra’s Ebit (earnings before interest and tax) margin dropped to 12.1% in the fiscal first half from 15% in FY19. This suppressed the company’s earnings growth during the first half. The management expects profit margins to recover to previous year’s (FY19) level in FY21 on better operating efficiencies and revenue flow from execution of large deal wins.
To be sure, profit margins did improve slightly in the September quarter to 12.8% from 11.5% in the three months ended June. According to SBICAP Securities Ltd, Tech Mahindra’s management expects FY20’s margins at around 13%, implying an improvement in the fiscal second half. Even so, caution persists and not everyone shares the enthusiasm on margin trajectory.
Profitability improvement is contingent on consistent execution, warn analysts at Elara Securities (India) Pvt. Ltd.
“Continued delivery excellence, the absence of transition cost, and portfolio synergy could be key tailwinds for YoY improvement in margin in FY21. However, we trim our assumptions and model in 14.1% Ebit margin for FY21E,” the brokerage firm said in a note.
Motilal Oswal Financial Services Ltd kept their estimates unchanged for FY20 and FY21.
The concerns are not unfounded. Employee attrition remains elevated. This may warrant an increase in expenditure on human resources. The deal pipeline continues to remain strong. Pipeline in the enterprise vertical is 20% more than the year-ago level. Moreover, the large deal pipeline in this business segment has doubled compared with the beginning of FY20.
The strong deal pipeline assures revenue visibility for Tech Mahindra. But there is no denying that high transition costs and patchy performance in the first half of FY20 are making analysts wary.
“Valuations are not demanding, but acceleration in revenue growth trajectory with margin improvement and consistency in performance would be key to drive further rerating, in our view,” analysts at SBICAP Securities wrote in a note.
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Top quant trade strategies for the week ahead

By Motilal Oswal Securities

Option Writing

Writing against Cash / Fut Holding
Sell TATASTEEL 520 CE 30-MAY-19 at `3.85

Leg 1: Sell TATASTEEL 520 CE 30-MAY-19 at `3.85
Leg 2: Buy TATASTEEL 560 CE 30-MAY-19 at `1.45
Target Level : 0.05
Stop Loss (Spread) Level : 3.85
Gross Monthly Yield : 1.25 per cent
ROI : 3.30 per cent
Margin : `75,000
Days to Expiry : 11
Writing against Cash / Future Holding
Sell LUPIN 810 CE 30-MAY-19 at `7.05
Target Level : 0.05
Stop Loss Level : 10.55
Gross Monthly Yield : 2.30 per cent
ROI : 5.95 per cent
Margin : `82,0 ..

Pair Trading
Leg 1 : BUY BAJFINANCE 1 LOT 30-MAY-19 at
`3,312.95 AND 60 SHARES IN CASH at `3,301.10
19 at `8,024.25
Tenure : 8-9 Days
Target Profit : 2.95 per cent
Stop Loss : 1.40 per cent
Margin : `5,20,000

This pair has 96 per cent correlation over the last one year. Pair has Trade lot ratio of 1.20 with price ratio of 0.41. It has come near to its average mean levels so may boun ..
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Sensex rallies over 100 points led by gains in auto, banking stocks

Sensex rallies over 100 points led by gains in auto, banking stocks
Bharti Airtel gained 1% after the company’s losses narrowed on quarter.
Investors await the next bi-monthly policy statement, due on 6 February.
Indian equity markets on Wednesday had opened little changed but soon rose nearly 0.4% led by gains in auto and banking stocks.
At 9.40am, the benchmark Sensex was up 0.4% or 174.50 points to 40963.88, while Nifty gained 0.41% or 49.5 points to 12029.10.
Most auto stocks gained at open, buoyed by the monthly sales data, which was in line with expectations. Tata Motors, Ashok Leyland, M&M, Apollo Tyres, Bajaj Auto gained 1-4%. TVS Motors gained 5%.
Among banking stocks, Axis Bank, Federal Bank, RBL Bank, Indusind Bank, SBI, HDFC Bank, Kotak rose 0.4-1.22%.
Index heavyweight Bharti Airtel gained 1% after the company reported narrowing of its losses quarter-on-quarter. For October-December, the telecom major reported a loss of ₹1,035 crore, less than the ₹23,145.60 crore loss posted in the September quarter.
Investors now await the next bi-monthly policy statement, due on 6 February, with the market keenly eyeing commentary on inflation and growth forecast. The RBI is widely expected to stand pat on rates, with the repo rate unchanged at 5.15% due to inflation trending higher, a Mint survey has found.
On Tuesday, the market had surged nearly 900 points largely because of fall in crude oil prices and improvement in manufacturing PMI data.
“We believe the budget has been a non-event and belied the lofty expectations. The government, however, has tried to balance growth concerns and fiscal prudence while providing relief to several segments e.g. tax relief for the middle-class and abolition of DDT. We believe the market’s focus should now revert to fundamentals, viz. corporate earnings growth and global cues around the spread of Coronavirus”, said Motilal Oswal Research in a report to its investors.
The Indian rupee had opened marginally higher at 71.21 against the US dollar, up from its previous close of 71.27. The 10-year bond yield was marginally up at 6.516% compared with its previous close of 6.505%.
Asian stocks were steady with positive bias, while overnight, the Nasdaq hit a record high and the S&P 500 had its best day in six months as fears of a significant economic impact from the coronavirus epidemic tapered off after China’s central bank intervened for the second straight day.
China injected 1.7 trillion yuan ($242.74 billion) via reverse repo on Monday and Tuesday, helping Chinese stocks recover some losses and lifting the world equity index .
The stimulus boosted investor sentiment even as several economists cut forecasts for 2020 global growth as the fast-spreading virus hampers business operations in the world’s second-largest economy.
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Sensex up in line with global peers; investors eye US-China trade deal

Sensex up in line with global peers; investors eye US-China trade deal
At 9.30 am, the benchmark Sensex was up 0.3% or 130.04 points at 41582.39 points
IIFL Securities expects the party in mid caps to continue today as investors make a beeline for higher delta stocks with mid caps making a strong come back.
Indian stock markets on Friday opened marginally higher tracking mostly upbeat global equities that rose in a relief rally following a de-escalation in tensions between the US and Iran. Investors have now shifted focus to US-China phase-one deal which is expected to be signed next week.
At 9.30 am, the benchmark Sensex was up 0.3% or 130.04 points at 41582.39 points, while the Nifty gained 0.29% or 35.35 points to 12251.25 points.
IIFL Securities expects the party in mid caps to continue today as investors make a beeline for higher delta stocks with mid caps making a strong come back.
The October-December earnings season kick starts today, Infosys Ltd scheduled to announces its results later in the day. Analysts expect the 3Q of FY20 to be another quarter of muted earnings, largely led by BFSI, auto and consumer segment. The IT major rose 1% ahead of its earnings.
Bharti Airtel rose 1% after Business Standard reported that it has received offers for subscriptions aggregating over $10 billion, three times its target of $3 billion, through a combination of qualified institutional placement (QIP) and foreign currency convertible bonds (FCCBs).
“Going ahead, markets would continue to be volatile in short term due to the tension in Middle East and upcoming 3QFY20 earnings season. Investors would also be watching out for pre-budget developments which would influence the market”, Motilal Oswal said in a note to its investors.
Meanwhile, shares in Japan and Australia nudged higher along with US equity futures, even as gains fizzled in Hong Kong and China. The S&P 500 Index climbed to a fresh record on Thursday and the yen dropped to a two-week low versus the dollar as tension in the Middle East ebbed. Also aiding sentiment, jobless claims fell more than expected, adding to signs of economic strength ahead of the US payrolls report later today.
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Wiped out by Motilal Oswal, shunned by a callous SEBI & ministry, the 78-year old's fight continues

A shorter version (reduced by 89.0%) can be found on IndiaSpeaks.
This is an extended summary, original article can be found here

Extended Summary:

Wiped out by Motilal Oswal, shunned by a callous SEBI & ministry, the 78-year old's fight continues.
Motilal Oswal, which preaches highest ethical practices, stuck to its stand of blaming its customer and keeping completely mum on the allegation that it had forged the PoA.
The reaction from the government is a shocker.
Is it any wonder that millions of investors have exited the capital market and prefer to invest in gold? But lets return to this war that Wg Cdr Raj is fighting at the fag end of his life.
The Forum asked him to take up the issue of getting his money back at the appropriate capital market platform.
This disregard for elected representatives, especially those who are not a part of the ruling government, is a hallmark of the past nine years under the United Progressive Alliance (UPA) government.
The ministers letter claims thatSushmita Sethi, assistant manager at the market intermediaries regulation and supervision department -IV at SEBI had responded to Wg Cdr Raj asking him to follow the procedure prescribed for redressal of grievances.
She is making no mention of forged PoAs and is avoiding this main issue to protect the broker..
And yet she claims she advised me.
Clearly, SEBI is hell-bent on protecting the broker Motilal Oswal.
Suddenly, the MoF letter mentions that the 78-year old ran up a turnover of a whopping Rs200 crore with the broker and that he had accepted this fact in an email to the brokerage.
Strangely, even Motilal Oswal, chairman of MOSL never mentioned this figure of trading turnover in his conversations with Moneylife.
But SEBI and the MoF are uninterested in these facts.
The investor says this is the first time that he has even heard about this amount.
He said, I never opened any margin account with MOSL.
Clearly, Motilal Oswal is hiding behind the facts and spinning new ones and SEBI and ministry of finance cannot be bothered about it.
Gross misuse of PoA by brokerages was a common problem during the last bull market.
The brokers get away scot free or with a minor punishment, and it is not long before they get back to their malpractices.
He has decided to fight.

Stats For Nerds:

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Not all analysts bearish on Tata Motors despite Q4 net decline

Brokerages have a mixed view on Tata MotorsNSE -0.37 % after the automaker reported a 49 per cent decline in consolidated profit for the quarter ended March.

Profit during the quarter stood at Rs 1,108.6 crore for the fourth quarter, with the decline mainly due to lower revenues and exceptional charge on account of its British arm Jaguar Land Rover. Revenue for the quarter fell to Rs 85,676.3 crore from Rs 88,966.3 crore in the same quarter last year. The stock slumped 7 per cent to Rs ..

CLSA recommended a sell rating on Motors with a target price of Rs 150, while Edelweiss has maintained hold rating and revised target price higher to Rs 186.

Jefferies, Phillip Capital, and Kotak Institutional Equities have maintained buy rating on Tata Motors. Nomura and Motilal Oswal are neutral on the stock and Morgan Stanley has retained its equal-weight recommendation.

CLSA, which has a bearish view on the stock said JLR has cut its margin guidance range and cash flow outlook for FY21 which underlines the challenges of improving profitability given a weak demand and product cycle. “We remain negative on the stock given multiple headwinds and insufficient nearterm product triggers at JLR and a looming downturn for Indian trucks. We cut our FY20-21 EPS by 18 per cent-22 per cent,” said CLSA.

Nomura said it does not expect any re-rating until JLR sustain ..

“Weakening outlook for the India business is fading the cost-cutting led recovery at JLR. FY21 could be a tough year for India and JLR. Furt her, the noise around EVs, Brexit and trade-war adds to the uncerta inty,” said Motilal Oswal.

Kotak Institutional Equities rema ins bullish. The brokerage said the management is on course to impro ve operating margins in both stan dalone and JLR businesses led by cost reduction initiatives.
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