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Capital Markets

Derivatives market comes home

Chidambaram: The finance minister's
announcement that foreign financial
institutions can offer stocks as
collateral in equity derivatives trading
should boost India's derivatives market



Restrictions hindering participation by foreign institutional investors (FIIs) in India's burgeoning equity derivatives market are slowly being lifted. The Indian finance minister Palaniappan Chidambaram announced in his budget speech in late February that FIIs can offer stocks instead of cash as collateral to trade in equity derivatives. That permits FIIs to put their holdings of Indian stock, worth over Rs34 billion ($777 million) in total, to use, and allows them to participate in a bigger way in the derivatives market. Putting up stocks instead of cash as collateral will help reduce the cost of arbitrage between the cash and futures markets, an area where foreign institutional investors are particularly active, says Mahesh Bhagwat, vice president at ICICI Securities, a large brokerage. Those opportunities for arbitrage have been profitable over the past year when futures have generally traded at a premium to prices in the cash market, he points out. "Even though prices of stocks FIIs hold have doubled over the last year, putting them in profit in the cash market, they must pay higher cash margins on their positions in the futures market," Bhagwat explains.

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