FIIs spared the cash call for Derivatives

Margins can now be paid using instruments

In a major move for the derivative markets, foreign institutional investors (FIIs) have been allowed to pay their margins in instruments other than cash. Thus far, margins on derivatives deals by FIIs had to be paid in cash.

Ashok K Mittal, the head of derivatives at SSKI Securities, said, "It is a positive move for FIIs and the market as it leads to better cash management and frees up their cash resources for other investments."

Sebi regulations do not allow payment on interest on cash kept as margin. The move will, however, lower the cost of derivative deals for FIIs.

Assume an FII has holdings in a stock, say Tata Steel. Now the fund manager wants to hedge his position by buying a call. At present, prior to making a derivatives deal he would have to may up cash upfront to the extent required under the margins for that stock.

This means that additional cash has to be brought in. Now he can use the underlying Tata Steel shares, which he already holds, as a collateral. Or he can also use any other instruments such as FDs, or even bank guarantees as collateral.

The new norm brings FIIs on par with domestic investors who are allowed to pay margins in all approved forms of securities.

Falguni Nayar, head of institutional equities at Kotak Securities, said this would increase FII participation in derivatives as it frees up their cash for investments other than collateral. She said that greater volumes can be expected in derivatives now. The cumulative investment of FIIs in derivatives is now around 34 per cent.

Understandably, FIIs are enthused about the relaxation. Andrew Holland, vice-president (research) at DSP Merrill Lynch said, "Now FIIs can leverage their stock and other holdings to fulfil their margin needs and use cash for more productive purposes."