Norms for investment and disclosure by Mutual Funds in Derivatives
Summary
SEBI modifies paragraph 8 of its 2010 circular to update guidelines for Mutual Funds participating in Interest Rate Swaps. The regulation permits plain vanilla IRS for hedging, capping the notional principal at the value of the hedged assets. Counterparty exposure limits are specified based on whether transactions occur over-the-counter or through CCIL.
Text
based on the feedback received from the industry, it has been decided to modify paragraph 8 of the aforesaid circular as follows
Mutual Funds may enter into plain vanilla Interest Rate Swaps (IRS) for hedging purposes. The value of the notional principal in such cases must not exceed the value of respective existing assets being hedged by the scheme
In case of participation in IRS is through over the counter transactions, the counter party has to be an entity recognized as a market maker by RBI and exposure to a single counterparty in such transactions should not exceed 10% of the net assets of the scheme
However, if mutual funds are transacting in IRS through an electronic trading platform offered by the Clearing Corporation of India Ltd. (CCIL) and CCIL is the central counterparty for such transactions guaranteeing settlement, the single counterparty limit of 10% shall not be applicable
This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996
Source: SecMarx — Norms for investment and disclosure by Mutual Funds in Derivatives. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.