Sebi panel moots leeway for FIIs in derivatives

Sebi panel moots leeway for FIIs in derivatives
ENS ECONOMIC BUREAU

Mumbai, Jan 11: Some members of the technical group on the new derivatives products of the Securities and Exchange Board of India (Sebi) on Thursday expressed the view that the growth of the derivatives segment was hindered by some regulatory issues pertaining to institutional investors and that they must be relaxed to boost volumes in the segment.

"As foreign institutional investors (FIIs) are not permitted to go for short sales in the cash market, they cannot take arbitrage opportunities between the cash and derivatives segments. There was also a view to allow them to take short sale positions for portfoilio balancing with some restrictions," Sebi board member Prof JR Varma told the newsmen on Thursday.

While permitting FIIs to trade in the derivatives segment, the Reserve Bank of India has stipulated that their overall open interest should not exceed 100 per cent of market value of their total investments. Market participants suggested in the meeting that the managed future funds should be permitted to take positions in the derivatives segment without having exposure to the cash market.

The issue about some income-tax related problems for the derivatives segment also came up for dicussion. As derivatives are considered as speculation for taxation purposes under the present laws, the members felt the need for hedge accounting standards on the lines of those in other countries. Prof Varma said that the issue would be discussed in the next Malegam Committee meeting.

The technical group also formed a sub-group of three members to study how sub-brokers could be allowed to trade in derivatives under the client-based gross margin system prevailing in the segment.

"Ratail investor participation in the cash market is catalysed by sub-brokers. The committee was of the view that to generate volumes in the derivatives segment at a much faster rate and to bring retail investor into the segment allowing them into the segment is a must," Prof J R Varma said.

Unlike, in the cash market where margins are broker-based, the margins are client-based in the derivatives segment. This calls for charging of margins to the individual investors by the exchanges. This avoids squaring of buy and sell trasactions of investors at broker level in the cash market and makes it necessary for payment of margins on both transactions.

In the cash market there was no need for the broker to know the name of the client of his sub-broker, but in the derivatives segment he ought to know them.

The group reviewed the present status of the derivatives segment, which witnessed a continuous growth from the inception in June 2000. Index-based futures trading is now available only on the Bombay Stock Exchange and National Stock Exchange in the country and the turnover on these bourses have touched Rs 50 crore per day (Jan 10, 2001).

The sub-group will have representatives of BSE, NSE and Sebi and is scheduled to have its first meeting next week, Prof Varma said. The move is expected to increase the reach of the segment. while BSE is covering 20 cities, NSE is covering 60 citites now.

According to Sebi sources, there are about 6,000 sub-brokers registered with the regulator and excluding registrations with multiple stock excahnges the figure would be over 5,000.

NSE to launch options by month-end
National Stock Exchange has told Sebi that it will be launching trading in index-based options by the month-end, while Bombay Stock Exchange sid that it would be ready to launch in March.

Both the exahgnes have made these commitments at the meeting of the Sebi's technical group on derivatives here on Thursday.

The committee has decided to discuss the introduction of derivatives in individual scrips only after trading in index-based options is launched. The regulator has already issued the risk management guidelines pertaining to index-baed options trading.