The National Stock Exchange (NSE) has received an approval from the US derivatives regulator Commodity Futures Trading Commission (CFTC) to sell its products to US-based investors. Going forward, US-based institutional investors will be able to trade in NSE-listed derivatives without any restrictions. The development will boost inflows coming into Indian derivatives from US-based institutions. The approval had been in the pipeline for more than a year now.
The US equity and commodity derivatives are regulated by CFTC and institutional investors based in the US are allowed to invest only in those derivatives that are CFTC-approved.
Until last year, these funds used to take the participatory note (p-note) route to trade in Indian futures, as this did not amount to direct exposure. However, the Indian markets regulator Securities and Exchange Board of India’s (Sebi’s) decision to ban p-note participants from taking unhedged positions in the futures market left these funds without any route to trade in Indian single-stock futures.
"In the absence of the approval, US funds were finding it difficult to access the Indian single stock futures market. That difficulty further got aggravated with Sebi's restriction on issue of p-notes with derivative as the underlying. Some of these investors may now consider registering as FPI to invest in stock derivatives," said Suresh Swamy, partner - financial services, PWC.
Also, investors who wanted an exposure to index futures used off-shore destinations such as the Singapore Exchange (SGX) to take exposure. Even this avenue has now been closed as Indian stock exchanges have terminated their data-sharing arrangements with foreign bourses.
Indian market participants have been concerned about the export of Indian derivative markets to off-shore destinations. Until the recent snapping of ties with bourses, SGX Nifty accounted for more than half of the index derivatives volume.
Market participants say CFTC approval could be a huge advantage for Indian markets, as it would attract more hedge funds. In the past two decades, hedge funds have emerged as a crucial set of investors in developed markets. For instance, the US hedge fund industry held assets worth $3.1 trillion as of January 2017, about one-and-a-half times the total market capitalisation in India.