Systemic probs, margin calls behind mkt woes: Dipan Mehta
Speaking to CNBC-TV18, Dipan Mehta, Member, BSE and NSE, said the reason for the fall in opening trade lies in the structure of the market. “We have been increasing the futures list and have been seeing leveraged positions being built-up in excess of Rs 1 lakh crore on the futures market. We have been seeing a lot of investors turn to traders and take long positions in the futures market. The damage of all these policies is something that we have to face at this point of time.”
He feels these leveraged positions are what are causing problems at this point of time. “Not to mention the fact that we are seeing relentless selling coming from FIIs as well. The circuit down closing on ridiculously low volumes has more to do with mark to market problems and margin calls.”
Excerpts from CNBC-TV18's exclusive interview with Dipan Mehta:
Q: What do you expect to see when the markets reopen? How much panic or problem is there by way of systemic issues right now?
A: It’s more of a systemic issue at this point of time. Just consider the facts. We have the best fundamentals in the entire globe and yet our markets are the worst performers. What are the reasons for that, no market is down 10% and we are down 10-12%.
The question we need to ask is what is the reason for that? The reason lies in the structure of the market. We have been increasing the futures list and have been seeing leveraged positions been built-up in excess of Rs 1 lakh crore on the futures market. We have been seeing a lot of investors turn to traders and take long positions in the futures market. The damage of all these policies is something that we have to face at this point of time. These leveraged positions are what are causing problems at this point of time, not to mention the fact that we are seeing relentless selling coming in from FIIs as well. But the circuit down closing on ridiculously low volumes has more to do with mark to market problems and margin calls.
Q: What is your expectation that buying would emerge in good quality stocks and will come off circuit? Do you think the systemic problems will lead us from one circuit to another?
A: Try to understand that the exchange calculation of margins is online. Every time a price comes in, the margin gets recalculated, whether it is initial margin, mark to market on any cash market or futures market.
So, if the market closes lower; that much more of the brokers margins are getting utilized. At this point of time, a lot of brokerages, even if they have liquidity, their margins which they have placed to the exchanges, are getting utilized to fund mark to market.
But at Stage I, the exchange will debit or take these margins from the broker’s account. That is creating the maximum problem. It is just that the online calculation of margins, the way the market goes down further, the mark to market losses, only expand. You cannot exit out of the positions, because the market is closed or there are no buyers. It is causing panic and tremendous stress on the entire system or the capital markets.
Q: Which is bigger, the weight of money, which might want to get in at these prices or technical unwinding pressures, which still remain in the system?
A: The technical unwinding problem still remains in the system. I would like to draw some parallel to what happened in May 2006. At that point of time, the total low open interest in stock futures was at Rs 33,000 crore. By June 14, when the market bottomed out, it fell to Rs 10,000 crores, which means that 70% of the open interest got squared up or was unwound.
At this point of time, the total decline is about 30% or Rs 24,000 crore. So, if you have a co-relation between what happened in May and what could happen at this time in 2008. We may have some more unwinding of positions take place at this point of time. That may keep certain pressure on the market.
If your confidence and stability comes back and overall investors get the impression that the worst is over and a lot of stock prices will eventually trade at high levels than what they are at this point of time, then the investor or speculator is not panicky to square up his long positions.
So, it is a bit of an emotional-cum-sentiment kind of issue, at this point of time. There is fear on the street and if some confidence comes back, the market will get back into its fair rhythm. All the issues of liquidity, mark to market and other issues will automatically get resolved.
So, it has more to do with confidence at this point of time.
Q: There has not been too much raised, by way of leveraging issue. How are things for retail and HNI, because they have taken fair positions in some of the IPOs. Is there probably a bit of a leverage situation in the secondary market as well?
A: The major leverage in the secondary market is through stock futures. If you see the numbers, which come from margin trading or from temporary funding provided by the brokers; those numbers are a pittance compared to the size of trading volumes or open interest, which is there in the futures market.
So, the primary provider of leverage in the secondary market is to the future.
Q: What is playing out in the dealing rooms now?
A: There is a squaring up of long positions. We are seeing a lot of expansion taking place among the retail brokerages. There are issues that the country has, in terms of communication, transfer of funds and collections. That is perhaps playing out.
Maybe, it has more to do with squaring up of long positions. I can imagine that the dealers are in touch with their clients, to ask them whether they are going to fund the mark to market losses, in the next few hours, or would like to square up their positions. That must be playing out at most brokerages, which have got a large retail base.
Watch the Video at Moneycontrol.com
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