Sebi widens MF disclosure norms in derivatives

Sets exposure limits

The Securities and Exchange Board of India (Sebi) has widened disclosure norms for derivative investments and set exposure limits for mutual funds (MFs).

The market regulator said there should be “prudential limits” for derivative investments by mutual funds. “The cumulative gross exposure through equity, debt and derivative positions should not exceed 100 per cent of the net assets of the scheme,” said a Sebi note on Wednesday.

It also said MFs should not write options or purchase instruments with embedded written options. Each position taken in derivatives should have an associated exposure. Exposure is the maximum possible loss that may occur on a position.
 

“The total exposure related to option premium paid must not exceed 20 per cent of the net assets of the scheme,” the circular said.

NEW RESTRICTIONS

• Cumulative gross exposure (equity, debt and derivatives) should not exceed 100 per cent of net assets of the scheme
• MFs not to write options or purchase instruments with embedded written options
• Total exposure related to option premium not to exceed 20 per cent of net assets of the scheme
• Cash or cash equivalents with residual maturity of less than 91 days may not be treated as creating exposure
• Exposure due to hedging positions may not be included in the limits

However, it said cash or cash equivalents with residual maturity of less than 91 days may be treated as not creating any exposure. Also, that exposure due to hedging positions need not be included in the limits if hedging positions are the derivative positions that reduce possible losses on an existing position in securities and till the existing position remains.

However, the derivative instrument used to hedge should have the same underlying security as the existing position being hedged to remain outside the limits’ purview.

At the same time, if the underlying quantity associated with the derivative position taken for hedging purposes does not exceed the quantity of the existing position against which a hedge has been taken, the exposure need not be included in the limits.

Sebi, however, said hedging positions cannot be taken for existing derivative positions. MFs are allowed to enter into no-frills interest rate swaps for hedging purposes, but in such transactions, the counter-party has to be an entity recognised by the Reserve Bank of India (RBI) as a market maker. “Exposure to a single counter-party in such transactions should not exceed 10 per cent of the net assets of the scheme,” said Sebi.

Earlier, Sebi had not specified the manner of disclosure of the derivatives position in the half-yearly portfolio disclosure reports. “The disclosures being made are not uniform across the industry,” the note said.

The regulator has also made a new format for the purpose of uniform disclosure of investment in derivative instruments.

All schemes launched after this circular must abide by the new provisions, while existing schemes would have to comply with the new norms by October 1.