The Hindu Business Line : Participation in derivatives <br>MFs can invest up to 50% of net asset: SEBI

THE SEBI has issued a fresh set of guidelines for participation by equity funds in derivatives trading for the purpose of hedging and portfolio balancing, along with the caveat that derivative positions must never (not even for a few moments on an intra-day basis) lead to actual or potential short sale/short position on any of the underlying securities.

The regulator, which requires all long positions to be backed by cash or stock at the time of exposure, has stated that each fund must have a maximum derivatives net position of 50 per cent of its portfolio. The maximum exposure should be decided in advance, with the formal consent of the trustees. The latter must specify the limits per scrip/instrument. The trustees must also satisfy themselves that all risk containment measures are in place.

For calculating overall derivatives exposure, the total of all positions on individual stocks plus positions on indices must be considered. In addition to the limits, a fund must work out a worst-case scenario exposure on the total positions on any underlying security. This exposure must not exceed the Securities and Exchange Board of India exposure norms. The regulator will further allow positions involving multiple derivatives positions on the same underlying security.

The revised guidelines, which follow AMFI's representation on clarifications for hedging and portfolio balancing, have been issued in line with Regulation 77 of SEBI (Mutual Funds) Regulations, 1996. The regulator, which had in two cases earlier come up with circulars on the same subject, has also outlined what it has called "a few sample cases of basic derivative positions."

Funds must disclose the maximum net derivatives exposure in terms of percentage of portfolio value and limits of exposure per scrip/instrument in offer documents. Data of actual exposures should be disclosed in half-yearly statements. When calculating the industry exposure for disclosure on a monthly basis, the total exposure per scrip (including derivatives) will have to be considered. Also, all details should be reported to the board of trustees in the next meeting.

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