Until now, Sebi has adopted a cautious approach towards allowing MFs to invest in derivatives since the asset class is considered highly risky compared to equities or debt. Currently, there are several restrictions on MF investments in equity derivatives. For instance, current rules permit MFs to invest in derivatives only for hedging purposes. The extent of exposure that an MF takes for hedging purposes cannot exceed the equity exposure that is being hedged. MFs are not allowed to write options and the total equities, debt and derivative exposure of a MF cannot exceed the Assets under Management (AuM) value. However, with the improved liquidity and stable settlement systems, the market regulator is of the view that more leeway could be provided for MFs in derivative markets.
Sebi has been making several efforts to deepen the Indian derivative markets. Sources say, Sebi has also reached out to other regulators including Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (IRDAI) asking them to consider relaxing the derivative investment rules for institutions under their jurisdictions. While all the insurance companies are regulated by IRDAI, non-banking financial institutions (NBFCs) and banks are regulated by RBI.
“Various measures would be required in order to create a more balanced participation in derivatives. Therefore, there is need to relook at the regulatory restrictions placed on domestic institutions especially in light of the fact that Indian markets already have a robust risk management framework in place,” memorandum of Sebi board.
In developed markets, institutions such as MFs, NBFCs and Insurance companies are big players in the derivative markets. However, Indian derivative market is largely dominated by brokers and retail investors. While proprietary trades account for over 40 per cent of the total derivative volumes, retail investors account for another 24 per cent. Mutual funds account for only 0.4 per cent of the total volumes.
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