Sebi to ease norms for MF in derivative investment by raising cap on F&O

Market regulator the Securities and Exchange Board of India (Sebi) is planning to ease the norms for mutual funds (MF) participation in the derivative markets. According to the sources, the regulator is considering measuring such as, allowing domestic funds to 'write' options and increasing cap on F&O investments. The move is a part of Sebi’s efforts to deepen the Indian derivative markets.

Until now, Sebi has adopted a cautious approach towards allowing MFs to invest in derivatives since the asset class is considered highly risky compared to equities or debt. Currently, there are several restrictions on MF investments in equity derivatives. For instance, current rules permit MFs to invest in derivatives only for hedging purposes. The extent of exposure that an MF takes for hedging purposes cannot exceed the equity exposure that is being hedged. MFs are not allowed to write options and the total equities, debt and derivative exposure of a MF cannot exceed the Assets under Management (AuM) value. However, with the improved liquidity and stable settlement systems, the market regulator is of the view that more leeway could be provided for MFs in derivative markets.

“The issue was discussed in the last board meeting and Sebi is currently reaching out to various stakeholders for views on the matter. The idea is to open up the derivative markets for MFs in a gradual manner. The idea is to encourage more MF participation in derivative markets without making them excessively risky products,” said a source.

Sebi has been making several efforts to deepen the Indian derivative markets. Sources say, Sebi has also reached out to other regulators including Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (IRDAI) asking them to consider relaxing the derivative investment rules for institutions under their jurisdictions. While all the insurance companies are regulated by IRDAI, non-banking financial institutions (NBFCs) and banks are regulated by RBI.

In developed markets, institutions such as MFs, NBFCs and Insurance companies are big players in the derivative markets. However, Indian derivative market is largely dominated by brokers and retail investors. While proprietary trades account for over 40 per cent of the total derivative volumes, retail investors account for another 24 per cent. Mutual funds account for only 0.4 per cent of the total volumes.