Ok, this is getting into silly season territory now. Everybody wants a market shutdown without having an understanding of the role of the markets. The role of the markets is to price what's happening to the companies/economy. It doesn't matter the situation, they will have to
reflect the underlying realities of the companies that trade on the exchange. Now, one of the reasons, a rather emotional one being thrown around is that why put employees at risk? We aren't in 1991. Almost all the brokers that count today are fully digital!
Almost all the big brokers which account for almost all the volumes are working from home, including the nation's largest broking firm. The next complaint is how will dealers work? The exchanges have published a circular allowing dealing from alternate locations.
Mutual funds, brokers and other financial services have stopped physical KYCs, physical collection for forms, etc There is no risk here. High touch activities in financial services have been curtailed for a while now. BCP protocols have been instituted across.
The next complaint, is why should the markets function when there is no economic activity? Are you kidding me? All the NSE 500 companies have shut down? What rubbish is this? As long as Rs 1 of economic activity is being undertaken markets have to price it, doesn't matter,
what it is. If a company is paying salaries while being fully shut (not happening), the markets must digest and reflect that action. This is sacred and tampering with this is sacrilege. The Indian exchanges are fully digital, we don't have floors and pits. The exchanges also
have multiple disaster recovery sites, that's how prepared they are. The same goes for the depositories and clearing corps, they are fully digital. I am not saying this will all be 100% seamless, of course, there's bound to be disruption but, the times demand.
All the intermediaries are fully digital. Mutual fund platforms are fully digital. Over 60-70% of all trading today happens on mobiles. SEBI has already made proactive concessions to make life easy for entities
sebi.gov.in/legal/circular…
sebi.gov.in/legal/circular…
Now, shutting down the markets isn't like switching off your bathroom light. A vast majority of the trading activity on the Indian exchanges are derivatives, unwinding them is not as easy as snapping your finger. Then there are 2nd order effects to that. Arbitrage mutual funds,
for example use futures, an entire category has to be shut down, it's an 80,000 crores category (not all futures). Then other mutual funds use some futures too. Unwinding all positions en-masse will lead to the end of times. Or if you just shut down the markets with the positions
intact, the MTM changes alone will cause ripple effects. Margin funding activities will be under risk, and brokers, etc may go bust putting the system at risk. If there is further volatility, market open and there more volatility, brokers etc will take a hit!
And we have a percent here. Philipines markets crashed after a 2-day halt upon re-open
philstar.com/business/2020/…
philstar.com/business/2020/…
Then there is the loan against shares and other lending tied to equities. if markets crash upon re-opening, all hell will break loose over the flurry of margin calls. Then there's the question of global ETFs and funds. We'll probably be kicked out of MSCI global indices.
Overnight India will become a pariah to global investors and we will definitely be a banana republic. Then there's the question of retail investment in the markets. Plenty of people have parked their emergency savings in overnight, liquid, UST, Liduif ETFs. If the capital markets
to shut down, there will be redemptions en-masse! Will the debt markets be able to handle such volumes? That's a mini-run on debt mutual funds! The attendant panic will also definitely lead to redemption in equity mutual funds too.
Then, there's the question of complicated instruments like convertible bonds and other debt securities where holders hedge in cash markets. Then this will also inevitably feed into the banking system, given how inter-connected everything is. Not mention what will happen
in the debt markets. I mean our markets are small, but not insignificant. Italy has been on a virtual shut down, the financial markets are functional.
Italy has been on a virtual shut down, the financial markets are functional. So are France, Holland, and the United States itself. Moreover, if the markets are shutting down, why shouldn't the banks shut down? You may not interact with the markets but in a financialized
economy, the financial markets are just as important as the banks. The role of the markets is to reflect the economic realities of the country - both good & bad and provide liquidity at all times - no matter how bad the spreads.
People asking for markets to be closed out of some misguided humanitarian notion will do well to understand the real-world impact of closing the markets. The financial markets aren't just brokers and dealers, the ensuing damage will be an order of magnitude higher
than anything, these people can fathom. Having said that, unless the exchanges, depositories, clearing corps, ISPs, banks come out openly and say that functioning isn't possible, there's no point in shuttering the markets. They will have to continue to reflect the true prices.
More:
