The Smart Way Of Investing In Gold!

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Gold has been a talk of the town, and it has been a hot commodity for over a year since it started a Bull Run. The steam isn’t off and everyone is interested in Gold as an investment, a safe asset, or from a consumption point of view. Gold derived its Latin name and its symbol from the word “Aurum” which means yellow shining metal. In the medieval ages it was used to serve as a form of payment and making jewelry. Since Gold is non-reactive and non-corrosive in nature so it was easier to isolate, but its limited supply made it a precious metal. In the modern era Dollar was pegged to Gold due to which it became a by default reserve currency, being pegged to Gold means the USA can print as many dollars which is equivalent to their gold reserves this was called as Bretton Woods System. But in 1971 everything changed when Richard Nixon removed the Gold Pegging replacing with Fiat currency. Over the years Gold has been a crucial part of the forex reserves of various countries. Even acc...
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RBI’s Margin Crunch: F&O Volumes Under Fire!

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So, before we divulge in the topics let's get familiar with few terms.

The Clearing Member clears and settles deals/trades for a segment in a manner and mode and subject to such terms and conditions and procedures prescribed for them and they do this via Clearing Corporation. There are 3 types.

  • Self-Clearing member:

These entities clear and settles the trades for themselves and their clients, example Zerodha, Dhan.

  • Clearing Member:

They Clear and settle the trades for themselves and their clients if the client chooses them as a clearing member

  • PCM (Professional Clearing member):

They are not trader themselves but they clear and settle the trades for their clients for a fee.

Prop Desk/Prop Trading.

Prop trading is where a broker uses its own funds to place trades, you need to pass NISM VIII Equity Derivatives Certifications, and then you need to find a broker that will fund your strategy. And after this is done, you can only trade as dealer once you are employed under the broker.

Leverage in prop desk: Suppose you give 1 Lakh to the broker; the broker will turn that 1 lakh to FD and use that FD to give you a 2X/3X or even 4X Bank guarantee that will go through clearing members to give you the leverage and you can trade with that. Many HNI clients go through this route to form a "Prop Desk"

These prop desks generate volume and act as market makers.

NEW RBI GUIDELINES REGARDING PROP DESKS.

“Banks shall not provide finance to a CMI for acquisition of securities on its own account, including for proprietary trading or investments."

The prop trading firms loses the leverage and the higher trading margin they got through the banks; the banks can still give margin but that margin has to be backed with at least 50% cash and rest as cash equivalents/ govt securities.

This will deeply impact volumes and liquidity, as per current reports FnO volumes have shrinked by 20-25% and VIX is at hovering near low levels of 11-12.

Let's understand low rules were changed regarding leverage.

The PCMs earlier only needed 25% collateral to get 100 rupees of BG (Bank Guarantee) but now they have to put 50% as collateral to get the same 100 rupees of BG, this will definitely increase cost for PCM's which may be passed on to the brokers who use PCM's.

Intraday Funding will get expensive too, as brokers used leveraged BGs to fund the intraday options generally 2X but now they have to keep 100% collateral for intraday facilities.

For example, Broker A gives bank 100 CR then they will get 200 CR as margin using BG's which can be used to give retail and prop desks for intraday trading.

MTF funding will get costly since banks now need 100% collateral with at least 50% as cash or cash equivalents and the haircut on securities will be minimum 40% vs 33% now.

When there is implement of strict funding guidelines BSE is estimated to lose around 20% of the trading volume, which primarily affects the market makers. Along with this the 3PM wild move that we are habituated to see on Sensex’s expiry will most probably cease to occur. Sensex expiries will not be wild as it used to be in the past. BSE is also estimated to lose revenue and its stock have corrected itself by more than 6% since July 1st.

MCX The Collateral Damage:

The Trading volumes on MCX is expected to take a huge dive as the commodities segment carry one of the highest leverages. The first three trading sessions of July have dismantled it. MCX premium turnover fell on Wednesday, fell further on Thursday, and dropped again on Friday. This is totally attributed to the tightening of RBI collateral norms. There is nothing wrong in MCX but RBI totally changed how the market participants fund their margin.

Since the margin is going down, so as the turnover of the MCX this will affect the revenue which is reflected in MCX stock which have corrected itself by more than 10% since July 1st.

TLDR;

-Banks are barred from funding proprietary books.

-Brokers must secure 100% of bank credit with eligible collateral, equity pledges now face at least a 40% haircut

-Client MTF remains allowed, but higher broker funding costs will drive down the volumes

-Reducing leverage can drive down volumes by a significant amount, BSE volume reduced by 20%.

-MCX collateral damage.

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