22 March, 2011
Option schemes face Sebi heat
Regulator warns brokerages, wealth managers against making false promises.
A large number of the so-called 'assured' or 'indicative' return schemes run
by leading stock brokers and financial services firms, mainly in the equity
derivative segment, have come under the regulatory scanner. For, it appears,
investors are being lured into derivative schemes by verbal assurances of
returns, something not permitted by the market regulator, the Securities and
Exchange Board of India (Sebi).
Regulator warns brokerages, wealth managers against making false promises.
A large number of the so-called 'assured' or 'indicative' return schemes run
by leading stock brokers and financial services firms, mainly in the equity
derivative segment, have come under the regulatory scanner. For, it appears,
investors are being lured into derivative schemes by verbal assurances of
returns, something not permitted by the market regulator, the Securities and
Exchange Board of India (Sebi).
In the recent past, Sebi and the National Stock Exchange (NSE) have received
several complaints against wealth managers or brokers. Complainants say
their money was diverted for trading in index options with a promise of a
certain fixed return. However, they lost money as the bets went wrong.
These schemes have been under watch after a derivative product, Options
Maxima, run by Aditya Birla Finance, lost an estimated Rs 100 crore and went
bust last year. Also, losses to the tune of Rs 300 crore came to light in
the case of trades (mainly index options) conducted by Citi Group's now
jailed wealth manager, Shivraj Puri, through a couple of brokerage houses.
An official from Sebi said, "In most cases, there is a private arrangement
between clients and the sellers of such schemes, so we are issuing warnings
to brokerages against luring clients with promises."
Source, concerns
According to this official, another area of concern was the source of funds,
as index option volumes had surged alarmingly in recent times. "This
requires following of proper know your customer norms, which is where we
will crack the whip if irregularities are found," added the official.
A fat commission on option trades is the key reason why brokerage houses are
encouraging and inducing clients to dabble in this segment. Most brokers
charge a flat fee in the range of Rs 50 to Rs 100 per lot per leg - on each
buy and sell transaction - in the options segment. In cases where volumes
are high, the cost could be lower. Also, the risk element is relatively less
for stock brokers in allowing the clients to trade (especially when buying)
in index options. To play in Nifty options, one has to pay just a premium on
the strike price. This is as low as 1-1.5 per cent of the price of the
asset. However, in the futures segment, the risk for brokers is high, as
clients take positions by paying as much as 20-30 per cent margin money and
it may become difficult to recover the remaining money during crises.
"Due to high competition, brokers are using higher-margin options trades to
enhance their revenues because of high volumes. Sometimes, even the KYC
norms are neglected. Retail investors should be cautious, as there are many
'ifs' and 'buts' attached to such schemes," said a South Mumbai-based equity
advisor.
Not surprisingly, volumes in the options segment have seen a sharp rise. On
the NSE, the share of options trading in the overall derivatives segment
rose to 72 per cent at the beginning of this year. It has continued at that
level. In January 2010, this number was 50 per cent. Of the total option
segment turnover, Nifty index options generate 96 per cent of volumes. On an
average, around Rs 1 lakh crore worth of equity derivatives are traded daily
on NSE. The fact that a majority of the volumes in options trading come from
the retail trade and high net worth individuals (HNIs) are a major cause of
worry, as they stay away from markets for a long time if they make huge
losses once.
"This proves the point that there are a large number of schemes being run by
brokers and wealth managers in private arrangement with clients. Such
schemes cannot be linked to stocks, as daily indicative bets are placed on
the benchmark index," said the head of an institutional desk.
"Relationship managers of broking firms, who are under pressure to meet
targets, are selling these types of derivatives products by verbally
promising assured returns," said the chief executive officer of a domestic
broking firm, on condition of anonymity. "Clients also need to be careful
and understand the product. They start complaining when they make losses."
several complaints against wealth managers or brokers. Complainants say
their money was diverted for trading in index options with a promise of a
certain fixed return. However, they lost money as the bets went wrong.
These schemes have been under watch after a derivative product, Options
Maxima, run by Aditya Birla Finance, lost an estimated Rs 100 crore and went
bust last year. Also, losses to the tune of Rs 300 crore came to light in
the case of trades (mainly index options) conducted by Citi Group's now
jailed wealth manager, Shivraj Puri, through a couple of brokerage houses.
An official from Sebi said, "In most cases, there is a private arrangement
between clients and the sellers of such schemes, so we are issuing warnings
to brokerages against luring clients with promises."
Source, concerns
According to this official, another area of concern was the source of funds,
as index option volumes had surged alarmingly in recent times. "This
requires following of proper know your customer norms, which is where we
will crack the whip if irregularities are found," added the official.
A fat commission on option trades is the key reason why brokerage houses are
encouraging and inducing clients to dabble in this segment. Most brokers
charge a flat fee in the range of Rs 50 to Rs 100 per lot per leg - on each
buy and sell transaction - in the options segment. In cases where volumes
are high, the cost could be lower. Also, the risk element is relatively less
for stock brokers in allowing the clients to trade (especially when buying)
in index options. To play in Nifty options, one has to pay just a premium on
the strike price. This is as low as 1-1.5 per cent of the price of the
asset. However, in the futures segment, the risk for brokers is high, as
clients take positions by paying as much as 20-30 per cent margin money and
it may become difficult to recover the remaining money during crises.
"Due to high competition, brokers are using higher-margin options trades to
enhance their revenues because of high volumes. Sometimes, even the KYC
norms are neglected. Retail investors should be cautious, as there are many
'ifs' and 'buts' attached to such schemes," said a South Mumbai-based equity
advisor.
Not surprisingly, volumes in the options segment have seen a sharp rise. On
the NSE, the share of options trading in the overall derivatives segment
rose to 72 per cent at the beginning of this year. It has continued at that
level. In January 2010, this number was 50 per cent. Of the total option
segment turnover, Nifty index options generate 96 per cent of volumes. On an
average, around Rs 1 lakh crore worth of equity derivatives are traded daily
on NSE. The fact that a majority of the volumes in options trading come from
the retail trade and high net worth individuals (HNIs) are a major cause of
worry, as they stay away from markets for a long time if they make huge
losses once.
"This proves the point that there are a large number of schemes being run by
brokers and wealth managers in private arrangement with clients. Such
schemes cannot be linked to stocks, as daily indicative bets are placed on
the benchmark index," said the head of an institutional desk.
"Relationship managers of broking firms, who are under pressure to meet
targets, are selling these types of derivatives products by verbally
promising assured returns," said the chief executive officer of a domestic
broking firm, on condition of anonymity. "Clients also need to be careful
and understand the product. They start complaining when they make losses."
Published in the Interest of the Investors..
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