Trading by Mutual Funds in Exchange Traded Derivative Contracts

DNPD/Cir-29/2005 · 2005-09-14 · SEBI

Summary

This circular permits Mutual Funds to participate in the derivatives market at par with Foreign Institutional Investors for hedging and rebalancing purposes. It establishes specific position limits for index and stock-based derivatives, distinguishing between overall fund limits and scheme-wise constraints. The document mandates disclosure requirements and consent procedures for existing schemes while applying new rules to launched or proposed schemes.

Text

it has been decided to permit the Mutual Funds to participate in the derivatives market at par with Foreign Institutional Investors (FII). Accordingly, the Mutual Funds shall be treated at par with a registered FII in respect of position limits in index futures, index options, stock options and stock futures contracts.

This revised policy shall be applicable to all new schemes which are yet to be launched, or for which offer documents have been submitted to SEBI for approval. Appropriate disclosures shall be made in the offer document regarding the extent and manner of participation of the schemes of the Mutual Funds in derivatives and the risk factors, which should be explained by suitable numerical examples.

The participation of existing schemes of the Mutual Funds in the derivatives market shall be subject to the following conditions: 1. The extent and the manner of the proposed participation in derivatives shall be disclosed to the unit holders. 2. The risks associated with such participation shall be disclosed and explained by suitable numerical examples. 3. Positive consent shall be obtained from majority of the unit holders. 4. An exit option shall be provided to the dissenting unit holders.

No exit load shall be charged to the unit holders exercising such exit options.

The Mutual Fund position limit in all index options contracts on a particular underlying index shall be Rs. 250 crore or 15% of the total open interest of the market in index options, whichever is higher, per Stock Exchange.

The Mutual Fund position limit in all index futures contracts on a particular underlying index shall be Rs. 250 crore or 15% of the total open interest of the market in index futures, whichever is higher, per Stock Exchange.

Short positions in index derivatives (short futures, short calls and long puts) shall not exceed (in notional value) the Mutual Fund’s holding of stocks.

Long positions in index derivatives (long futures, long calls and short puts) shall not exceed (in notional value) the Mutual Fund’s holding of cash, government securities, T-Bills 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 in such stock shall be 20% 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 in such stock shall be Rs. 50 crore.

For stock option and stock futures contracts, the gross open position across all derivative contracts on a particular underlying stock of a scheme of a mutual fund shall not exceed the higher of: 1% of the free float market capitalisation (in terms of number of shares). Or 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts).

For index based contracts, Mutual Funds shall disclose the total open interest held by its scheme or all schemes put together in a particular underlying index, if such open interest equals to or exceeds 15% of the open interest of all derivative contracts on that underlying index.

Source: SecMarx — Trading by Mutual Funds in Exchange Traded Derivative Contracts. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.