The National Stock Exchange (NSE) has received approval from the US derivatives regulator, Commodity Futures Trading Commission (CFTC), to sell its products to US-based investors.
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.
With the approval, US-based institutional investors will be able to trade in NSE-listed derivatives without any restrictions.
“This is a very positive development for the Indian derivatives market. Investors who have been opting for indrect participation will now be able to directly invest in Indian derivatives. It will also improve the liqudity in Indian derivatives further,” said Ravi Varanasi, chief of business development, at NSE.
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. But, 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 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 derivatives as the underlying. Some of these investors may now consider registering as FPIs (foreign portfolio investors) to invest in stock derivatives,” said Suresh Swamy, partner-financial services, PwC.
Also, investors who wanted an exposure to index futures used offshore destinations such as the Singapore Exchange (SGX) to take exposure. Even this avenue is now 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 derivatives markets to offshore destinations. Until the recent snapping of ties with bourses, the 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. As of January 2017, the US hedge fund industry managed assets worth $3.1 trillion, about one-and-a-half times the total market capitalisation in India.