The Securities and Exchange Board of India (Sebi) will shortly hold joint talks with the Association of Mutual Funds in India (Amfi), the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) to fine tune the regulations for higher and easier participation of mutual funds in equity derivatives. The possibility of allowing mutuals to introduce guaranteed return plans based on derivative products will also be discussed.
Sebi officials said that while the regulatory provisions were in place, what needed to be defined was the advantage accruing to MFs from trading in derivatives. Also the systems needed to be put in place would be discussed at the meeting, sources said. At present, very few MFs have shown an interest in derivatives leave alone trading in the products. Further, the concerns and the role of trustees will also be discussed.
At present, mutual funds participation in derivatives especially in index and stock futures and options is negligible. MFs are facing administrative and functional problems which is hampering their foray into derivative products, mutual fund representatives said.
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Mutual funds feel that derivatives may help them to offer capital guaranteed or assured return schemes. However, certain issues need to be sorted out by the regulatory authorities before the scheme can be introduced, sources said.
"There is lack of clarity on usage of derivatives by MFs. Moreover, accounting and taxation guidelines are not in place, there is no level-playing field between domestic mutual funds and foreign institutional investors. Further, stock lending and borrowing system is also absent," Khozu Arsiwalla, head future and options, JP Morgan said in a recent presentation.
Shailendra Bhandari, managing director, Prudential ICICI AMC said that Sebi's clarification on regulations for mutual funds participation is must.
"Mutual funds are not sure how a covered call in-the-money may be treated. It is not clear that if a covered call of out-the-money may be treated as hedging, would in-the-money call option be treated as leveraging," Bhandari said.
With the recent permission for individual stock futures in 31 stocks, equity derivatives are expected to an integral part of the market and if mutual funds are not able to use these products to enhance their performance and efficiency, it would not be fair on the investors, sources said.
Currently, index futures and options are available on Sensex and S&P CNX Nifty and options are traded in 31 stocks.