| The Securities and Exchange Board of India on Wednesday allowed mutual funds to participate in the derivatives market, bringing them on a par with foreign institutional investors. |
| Until now, mutual funds could only hedge and re-balance their portfolios in the derivatives market. |
| Fund managers said this could theoretically release liquidity worth Rs 60,000 crore in the futures and options (F&O) segment of the market. |
| The decision is likely to enthuse the market, and the Bombay Stock Exchange Sensex, which closed at 8189.48 today, is expected to open at a higher level tomorrow. With the release of huge liquidity, volatility in the futures and options segment would rise, they pointed out. |
| The mutual funds will now be considered as trading members like the FIIs in respect of position limits in index futures, index options, stock options and stock futures contracts. Their schemes will be treated as clients like sub-accounts of FIIs. |
| "The mutual funds will be able to increase their exposure to the F&O segment up to 80 per cent backed by liquid securities or cash, unlike earlier when they could not exceed the limit of 50 per cent backed by cash alone,' said Krishnamurthy Vijayan, CEO, JM Morgan Stanley Mutual Fund. |
| According to him, this will lead to a sudden spurt in liquidity in the next few days and benefit the FIIs as they have huge exposures to the F&O segment. |
| AK Sridhar, chief investment officer, UTI Mutual Fund, pointed out that the funds would not rush towards the F&O segment because of the risks associated with it. "The funds will structure new products to have large exposure to the derivatives segment," he said. |
| According to Sridhar, the move to raise the cap of 50 per cent exposure in hedging will not make a major difference to domestic funds as most of them have still not completely utilised the existing ceiling. |
| The new policy will be applicable to all new schemes or to those for which offer documents have been submitted, seeking the approval of Sebi. A Sebi release said the mutual funds would have to disclose the extent and manner of participation in derivatives and the risk factors in the offer documents. |
| The mutual funds will have to acquire positive consent from a majority of unit holders and provide an exit option to dissenting unit holders. The exit option will have to be kept open for one month prior to the scheme commencing trading in derivatives. |
| The mutual funds will also not be allowed to charge exit load to unit holders exercising the exit options. The ban on mutual funds' participation in the derivatives market was imposed in accordance with the recommendations of the LC Gupta panel on derivatives. |
| The lifting of the ban follows recommendations by the Secondary Market Advisory Committee. |
| The mutual funds' position limit in all index options and futures contracts on an underlying index shall be Rs 250 crore or 15 per cent of the total open interest of the market in index and future options "" whichever is higher. This limit will be applicable to open positions in all options and futures contracts on an underlying index. |
| In addition to this, mutual funds will be allowed to take short positions in index derivatives (short futures, short calls and long puts) within the limit of their holding of stocks. |
| Besides, they will be also be allowed long positions in index derivatives (long futures, long calls and short puts) not exceeding funds' holding of cash, government securities and similar instruments. |
| For stocks in which the market-wide position limit is less than or equal to Rs 250 crore, the mutual fund position limit will be 20 per cent of the market-wide position limit. For stocks in which the market-wide position limit is greater than Rs 250 crore, the mutual fund position limit will be Rs 50 crore. Sudden Impact |
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