The Hindu Business Line : Will FII activity in F&O increase?

FIIs will now be able to take bigger leveraged bets in the Indian derivatives market, thanks to a new SEBI circular that allows them to use AAA-rated foreign Government securities as collateral to fund margin requirements.

Earlier norms required them to put up cash as collateral.

The regulator has said that clearing members can now accept foreign sovereign securities with triple-A ratings as collateral towards margin requirements for FII derivative transactions routed through the exchanges. This approval follows a recent enabling move by the Reserve Bank of India allowing clearing corporations and clearing members to open and maintain demat accounts with foreign depositories to pledge or transfer such securities as collateral.

The circular is likely to pave the way for enhanced FII participation in the domestic futures and options segment.

FII activity in the domestic derivatives market is typically a fifth of the overall trading turnover, both in the cash and derivatives market. It also offers foreign institutions an opportunity to put to use their idle holdings of any foreign Government bonds to back up their transactions in Indian stocks.

The circular has, however, also laid down a few measures by way of due diligence to be undertaken by clearing members before they accept such bonds as collaterals.

Recent US sub-prime woes may lead to concerns regarding the quality of collateral.

However, the SEBI appears to have circumvented such concerns by allowing only triple-A rated securities to be offered as collateral.

– BL Research Bureau