New FII norms will lead to reduced volatility

• SEBI has proposed to allow FIIs to use AAA-rated foreign government securities in lieu of cash for payment of margins against positions in derivatives.

• Margin payment is a headache in this business.. for all sorts of investors in futures and options.. They being FII s whose volume of transactions is huge its going to be a problem..

• Currently its a time for musings by various experts about the repurcussions of this policy move. In one such view - According to Professor Amit K. Barua, IIM Ahmedabad, in a debate in ET - this is what i can understand and present to you as per my existing knowledge base..

• its An appropriate beginning.

• This measure would allow FIIs to use their holdings in, sovereign Debts of foreign countries, eg. US government securities for investing in the Indian equity derivatives market.

• The 1st benefit will acrue from the outcome that FIIs will be able to change F and O positions without changing or shifting their cash market investment. So if a margin call comes from the exchange they can use their AAA grade US govt. securities as a margin without selling their cash market exposure to pay out the margins.

• Thus the volatility in the cash market of BSE and NSE that is caused by sudden withdrawal and infusion of funds by FIIs will decrease considerably.

• Result: This will make the entire process to happen in a phased manner. The reduced volatility in turn will make F and O prices cheap and make investment in to Equity options attractive plus hedging through options will also be attractive.

• The 2nd benefit will be seen in FOREX market. The exchange rate fluctuations due to the frequent entry and exit of FIIs' from the Indian equity markets will reduce.

• Result: The additional volatility in the market determination of exchange rates will die down as changes in FII exposure will not be drastic. The Forex Options will be cheaper AND will make hedging for "Exporters, IT Companies et all " cheaper against their risk of rupee apreciation against dollar etc.. and will be beneficial to whole indian economy.

• Currently there is a cap on the total value of the margin accounted for by foreign securities.

• This cap should be raised in a phased manner and can be removed also to reap the benefits in its entirety out of the current changes.

• If suddenly rupee apreciates then it will be difficult to realize the full margin value as foreign soveriegn assets are denominated in US dollar now so this adjustment should be accounted for in the margin requirement in advance.

• So, let us wait and watch how these new norms behave and how we digest their effects and hope for the best results for the Indian economy.

our sincere thanks to ET and the expert to enlighten us on this very important topic...