What are the charges on futures contracts?
Even when a broker claims that trading in futures and options is free of cost, it is not free. Even the low-cost brokerage houses make cash trading in delivery free of cost but brokerage on futures is charged. Apart from the futures brokerage, the futures transactions are also subject to other statutory charges like GST, STT, stamp duty, exchange charges, SEBI turnover fees, etc.
Brokerage on futures will be lower than cash market brokerage in the case of full-service brokers but that is more because futures charge brokerage on the notional amount. But futures brokerage is an important cost you need to understand to get the right break-even price while trading in futures contracts.
Understand the charges on futures contracts
Brokerage is the fee to the broker by the client trading on the exchange through the broker platform. Futures trading brokerage is not just the cost of executing the trade but the broker also takes the risk on behalf of the client and also clears and settles the trade with the clearing corporation on behalf of the client. This charge of brokerage is meant to compensate the broker for these services provided. Let us now understand the principal heads of the cost that you incur when you trade in futures contracts.
Of all the above charges, only brokerage goes to the broker. All the others are statutory charges only collected by the broker and handed over. However, as a client, this is still a cost to you and impacts your break-even point of trading futures.
- Futures and options brokerage: This is the charge paid to the broker for the service of execution, risk-taking and clearing, and settlement of trades on behalf of the clients. There are no standard rates but your specific rates will be mentioned in the client-broker agreement that you sign with the broker. Normally, brokerage on futures would be as low as 0.03% to 0.05% on the notional value of the futures contract and is mentioned in the contract note. Some brokers also charge futures brokerage at a flat rate per executed contract. In the case of options, the brokerage rate is normally charged at a flat on a per-lot basis at Rs.10 per lot and between Rs.20 per lot.
- Securities transaction tax or STT: In the case of a futures trade, the STT is charged only on the sell-side and not on the buy-side of the trade. When you sell futures, then STT is charged at 0.01% of the notional value of the contract. STT is based on the contract value and not the brokerage amount. Similarly, even in the case of options, the STT is charged at the rate of 0.05% of the premium value (note this is not the notional value) and it is again only on the sell side of the option and not on the buy-side.
- Exchange transaction charges: This is charged by the stock exchanges and the broker only collects it from the client on behalf of the exchange. The NSE charges exchange transaction charges at 0.0019% of the notional value of transactions while in the case of options it is charged at 0.05% of the premium value of the options transaction.
- Goods and Service Tax or GST: This is charged on the brokerage amount. The formula is slightly more expansive. The GST is billed at the rate of 18% on (Brokerage + transaction charges) in the case of futures and again at the rate of 18% on (Brokerage + transaction charges) in the case of options.
- SEBI turnover fee: This is charged by SEBI and is charged at a flat rate of Rs.5 for every Rs.1 crore value of trade transacted. These charges are collected by the broker and handed over to SEBI.
- Stamp duty is still a state-level levy. Unlike in the past when stamp duties were applicable at different rates for different states, now it has been standardized across India for simplicity.
What is the basis in derivatives?
In the futures market, basis represents the difference between the cash price of the commodity and the futures price of that commodity. The same logic applies if you are trading in equity futures, index futures, or even in the case of currency futures. In general, the basis is used by investors to gauge the profitability of delivery of the underlying.
The more important application is in arbitrage where traders buy in cash and sell in futures based on the basis spread and their view on how the spread will move. Typically, arbitrageurs will look to lock in the maximum basis spread and close the position at a profit when the basis spread comes down.
What is rollover
Rollover refers to when a futures trader stops trading the current contract and begins trading the succeeding contract. IN other words, he rolls over the contract from the current month to next month. In reality, there is nothing like rollover and it boils down to selling the current future and buying the next month's futures in case of rolling over a long futures position.
Nowadays it is a lot simpler as there are spread windows where you can just define the rollover spread and get an execution at the desired spread so profit projection becomes easier.
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Frequently Asked Questions
Apart from brokerage there are statutory charges like GST, STT, stamp duty, exchange charges and SEBI turnover fee.
Technically, you don’t need a demat account to trade in futures and options as there is no concept of delivery. However, now SEBI insists that any person with trading account must have demat account as F&O now are deemed to be delivered in the last week. You will also need demat if you want to offer your cash market shares as margin collateral to trade in future and options.
Yes monthly brokerage plans are available. Many brokers charge you a lumpsum amount like a Rs.999 plan or Rs.1,999 plan so that you virtually get unlimited trades for this amount and the brokerage rate is also steeply discounted.