Value of P-notes on derivatives reaches 2007 levels

Lokeshwarri S.K BL Research Bureau | Updated on March 09, 2018


But no threat this time as they account for only 12% of FIIs' assets

One category of market participants who would have made money in the ongoing correction is the trading fraternity. They can make the most of the market fall through shorting futures, buying put options and so on. It is, therefore, not surprising that unregistered overseas investors have increased their activity in the Indian derivative market though Offshore Derivative Instruments (ODIs).

ODIs outstanding are now nearing levels last seen in November 2007.

It is a widely known fact that Indian market began declining since November 2010 while most other regions followed suit only in August this year, following S&P downgrade of US sovereign debt rating. It is, therefore, not surprising that FIIs registered with SEBI have increased their activity in futures and options this calendar.

P-note route

Those foreign investors who are not registered with SEBI have preferred to play the market volatility through the P-note route.

Foreign institutional investors (FIIs) registered in India have recorded a 46 per cent jump in the gross derivative turnover between January and September this year over the same period in the previous year. Their activity appears to be mainly centred around index options, with stock options coming next.

Foreign investors not registered with SEBI invest in Indian market through ODIs. These are derivative instruments issued by FIIs and their sub-accounts to investors from other countries that wish to buy Indian equity or debt. These entities could have various reasons for adopting this route including the speed and the relative opacity that this channel offers.

According to data published on the SEBI Web site, P-notes drawn on derivatives towards the end of September have reached Rs 59,980 crore. Last time P-notes with derivatives as underlying around Rs 60,000 crore was in November 2007.

It may be recalled that the SEBI had imposed restrictions on the issue of these instruments in October 2007 since ODIs then made up more than 50 per cent of FII equity assets then. This restriction had the effect of pulling down the figure to Rs 4,841 crore by September 2008. These instruments are, however, not a great threat to markets currently since they account for only 18 per cent of FII assets.

Published on October 17, 2011

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