India’s capital markets sector could see a recovery in trading activity from December, as changes to expiry-day settlement rules ease the pressure on brokerages.
Supratim Datta, Vice President at Jefferies India Private Limited, expects the revised settlement mechanism to support order volumes, while margin trading risks remain under closer control.
Datta said the shift from closing auction session (CAS) prices to the volume-weighted average price (VWAP) for expiry-day settlements would help address uncertainty that affected options trading.
He added, “We think that October and November the adverse impact will continue, but from December onwards, order volumes for brokers should start improving.”
The impact of the regulatory changes was visible in August and September, with brokerage order volumes falling around 10-15% sequentially. However, the pressure is expected to ease as the revised settlement mechanism takes effect.
Within the capital markets sector, Jefferies continues to favour brokerage firms, followed by businesses that offer a hedge against commodity-related risks. Registrar and transfer agents (RTAs) also remain attractive, given the potential to grow non-mutual fund businesses, while asset management companies (AMCs) follow in its preference order.
Datta also favours exchanges with scope to increase market penetration, particularly in commodity derivatives, where options trading remains relatively underdeveloped compared with equity options. Exchanges heavily dependent on a single product are less attractive, given the risks associated with concentrated revenue streams.
Datta said margin trading facility (MTF) books have expanded over the past year, but brokers are taking a more cautious approach to lending. Following the sharp market decline in March, which led to higher delinquencies in MTF portfolios, brokers have tightened lending norms and adjusted leverage limits based on the risk associated with individual stocks.
Leverage is also lower for smaller companies than for largecap and megacap stocks. Brokers are monitoring their exposure to individual stocks and adjusting lending parameters to manage potential risks. September data from brokerages also indicated an improvement compared with the March episode.
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Jefferies prefers brokerages, expects trading volumes to recover from December
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