Sebi’s proposal to tighten the norms for investment in derivatives has run into opposition from mutual funds with the industry lobby arguing that fund managers need access to some of the products the regulator wants to ban.The Association of Mutual Funds in India (Amfi), the industry lobby, has sent its detailed response to the mutual funds advisory committee of the Sebi, which will take up the proposal at its next meeting on May 31.
Amfi said funds should be allowed to sell index futures, and write option subject to some safeguards.
When contacted Amfi chairman A P Kurian said: “We are compiling views of all our members and will soon send them to Sebi”.
The investment management department of the stock market watchdog has proposed that mutual funds not be allowed to write options or purchase instruments with embedded written options while recommending limits on the gross exposure on equity, debt and derivative positions.
It said that any derivative instrument used to hedge a risk must have the same underlying security as the investment being hedged. Effectively, the proposal rules out index derivatives, used by fund managers to hedge their portfolio.
Amfi has said since covered options are returns-enhancement strategy with risk reduction, they should be permitted with some limits. For instance, option exposure in a particular stock could be limited to 10% of net asset value.
It also wants market regulator to allow mutual funds to sell index futures against a stock portfolio, as it is the most efficient and cost effective way of managing market risk of the underlying stock portfolio.
It has suggested that a limit could be defined for such a hedge position as a percentage to the total stock portfolio.
The association has also opposed disclosure by way of trade summary and instead suggested that fund houses be mandated to disclose the outstanding derivative positions on a given date in a defined format.
