Sebi allows derivatives based on foreign indices

Indian investors will soon be able to place bets on foreign markets. The Securities and Exchange Board of India (Sebi) has issued guidelines for introducing derivatives contracts based on foreign indices.

This has paved the way for Indian exchanges to launch trading in leading global indices, including the S&P 500, the Dow Jones Industrial Average (DJIA) and the FTSE 100.

In a circular issued today, the capital markets regulator has laid down two broad criteria. Derivatives based on a foreign index will be allowed to trade in India if either of the two conditions are met – the foreign index features among the top 15 index derivatives globally, apart from being traded on some of the leading stock exchanges, or, it is broad-based, with a market capitalisation (m-cap) of at least $100 billion.

A “broad based” index, says Sebi, should have at least 10 stocks. And, no single constituent should have more than 25 per cent weight, computed in terms of free float market capitalisation.

‘Education needed’
Stock exchanges have welcomed the move, saying it will help investors diversify portfolios. They add that investor awareness will play an important role in popularising such products.

“Allowing foreign indices to trade in India is a welcome move,” said Ashish Kumar Chauhan, deputy chief executive officer, BSE. “It will allow domestic investors to diversify their allocation to global asset classes in a controlled manner.”

A National Stock Exchange (NSE) official said: “It will be our attempt to make domestic investors and participants aware of the different aspects of foreign indices.

He added, “We would launch some indices soon but before that we would like to organise some seminars to educate investors.” NSE has already entered into cross-listing arrangements with CME. It has exclusive rights for starting trading in the S&P 500 and DJIA rupee-denominated futures contracts in India. NSE has also signed a letter of intent with the London Stock Exchange for getting the FTSE 100 to India.

The MCX Stock Exchange (MCX-SX) has also entered into a tie-up with FTSE to facilitate creation of international investment products, including international FTSE indices, for listing and trading on MCX-SX.

Riders
If after introduction, the index fails to meet any eligibility criteria for three consecutive months, no fresh contract based on it will be introduced. “However, the existing unexpired contracts will be traded till expiry and new strikes may be introduced in these,”said Sebi. While the contracts will be denominated and settled in Indian rupees, trading will be restricted to Indian residents. The position limits will be applicable to such products in a manner similar to domestic stock index derivatives. Stock exchanges have also been directed to make available any material price-sensitive information and any news relating to regulatory actions or corporate actions on constituent stocks of the foreign stock index to Indian investors.