The capital market regulator has decided to allow foreign institutional investors (FIIs) to tender sovereign securities of other countries as collateral against their exposure in the derivatives market. The move, beginning with AAA-rated sovereign securities issued by the US, will impart volatility and more liquidity to fledgling futures and options market.
The Securities and Exchange Board of India (Sebi) said FIIs currently deposit the collateral in the form of cash with the clearing members for derivatives contracts traded on exchanges. Clearing members are required under the law to keep, for collateral purposes, at least 50% of liquid assets in the form of cash or cash equivalents while the rest could be in non-cash components.
FIIs contribute 70% of the turnover in the derivatives segment of NSE. The average daily turnover on the NSE?s derivatives segment in the first four months of the current financial year was Rs 51,000 crore.
According to Siddarth Bhamre, derivatives analyst at Angel Stock Broking, said, ?The move will boost liquidity in the market. At the same time, this will allow FIIs to take highly leveraged positions, which could lead to a high degree of volatility during adverse scenarios.?
In a presentation at a recent meet on derivatives, Prachetas Raykar, senior vice-president (market development), HSBC, had said, ?Merchant banks (FIIs) with their global reach are better poised to offer collateral management services.?
The Sebi move follows a recent circular issued by the RBI permitting FIIs to offer foreign sovereign securities with AAA rating as collateral to recognised stock exchanges in the country for their transactions in the derivatives segment. The foreign sovereign securities will be treated as part of the cash component of the liquid assets of the clearing member and will be subject to the condition that the value of these is not more than 10% of the total value of the cash component of the liquid assets of the clearing member.