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Allow FIIs to trade derivatives, moots Sebi panel

Priya Ganapati in Bombay

An expert panel of capital market watchdog Securities and Exchange Board of India has recommended that foreign institutional investors be allowed to trade in Sebi-approved derivative contracts.

The panel also mooted that margin trading should be introduced in the stockmarkets, and banks should be roped in as channels to provide the funds through the stock exchange clearing house or corporations.

Currently, the Reserve Bank of India allows FIIs to trade only index futures contracts.

The Sebi advisory committee on derivatives, which met for the first time on Tuesday, also made the following recommendations aimed at boosting the moribund capital markets:

• FIIs should be permitted segregated short-selling account with a limit on the overall exposure, capped to the exposure in the derivative market.
• No additional stock options to be introduced till the market attains certain level of maturity.
• Physical settlement of stock option contracts to be introduced at an early date to provide linkages in prices of stock in cash and derivative markets.

These recommendations will now be taken up by the Sebi board and a representation will be made by the board to the Reserve Bank of India, wherever RBI permissions are necessary.

The committee said that the recommendations regarding segregated short selling for FIIs is because the various barriers in the market for different category of participants needs to be streamlined and standarised to ensure equal access to all investors.

A sub-group, headed by Prof J R Verma, former Sebi member, has been formed to review the implementation of value at risk-based margins in the equity markets.

The group will submit its report in fifteen days, informed Sebi executive director Pratip Kar.

The group was of the view that segregated short sales for institutional investors should be put in practice where they would be allowed to sell the securities in cash market in proportion to their exposure in the derivatives, he said.

The involvement of banks in this segment would provide more liquidity and reduce the barriers between various segments of the market, he added.

Another recommendation, according to Kar, was the creation of a new class of brokers who would be permitted to clear trades on their behalf and clients with net worth criteria of Rs 10 million.

The group felt stock futures for individual scrips was a logical extension of derivatives product available in the market and should be introduced along with stock lending system.

On margins trading, banks, subject to RBI clearance, could lend to exchanges which in turn would provide assistance to brokers. This way, the risk exposures would be limited for banks, Sebi chairman D R Mehta said.

The issue of demutualisation of stock exchanges was also discussed with representatives of BSE and other stock exchanges.

Sebi has reiterated its commitment towards a speedy demutualisation process, but no concrete decisions have been taken as clarifications on certain legal issues are needed from the finance ministry.

The advisory committee on derivatives has also asked NSE and BSE to examine the legal issues on the fungibility of collateral deposited by members between the cash and derivative segment. NSE and BSE have been asked to submit a legal opinion to Sebi on this.

Additional inputs: Agencies

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