SEBI widens Investment and Disclosure Norms of Mutual Funds in Derivatives by permitting the Funds to Write Call Options

Jan 17, 2019 | by Avantis RegTech Legal Research Team

On January 16, 2019, the Securities Exchange Board of India (SEBI) has passed a circular providing the norms for investment and disclosure by Mutual Funds in derivatives with reference to the SEBI Circular passed on August 18, 2010 on “Review of norms for investment and disclosure by Mutual Funds in derivatives”.

Mutual Fund Schemes were permitted to undertake transactions in equity derivatives according to the exposure limits mentioned in Paragraph 4 of the Circular that is “Mutual Funds shall not write options or purchase instruments with embedded written options”. Now with the recommendations of Mutual Fund Advisory Committee (MFAC), SEBI has decided to permit mutual funds to write call options. With the modification in Paragraph 4 of the Circular, Mutual Fund Schemes may write call options as per the call strategy of NIFTY 50 and BSE SENSEX. Those are:

a)       The nominal value of the call options shall not exceed 15% of the total market value of equity shares.

b)      The total number of shares underlying the call options written shall not exceed 30% of the unencumbered shares of a company. The unencumbered share means the shares that are not any kind of encumbrances, margins or a part of shares in Securities Lending and Borrowing Mechanism (SLBM).

c)       Th Scheme has 7 trading days to rebalance the portfolio in case of breach of provisions at paragraph 4(a) and (b).

d)      The Mutual Fund scheme needs to comply with Paragraph 4(a) and (b) of the scheme, in case of selling the securities.

e)      The Mutual Fund scheme shall not write a call option without holding the underlying equity shares.

f)        The total gross exposure related to option premium paid and received must not exceed 20% of the net assets of the scheme, as prescribed in the terms of Paragraph of the Circular.

g)       The cumulative gross exposure of the call option written under Paragraph 3 of the Circular will not be considered as exposures.

h)      The call option written will be marked to market daily and the respective gains or losses factored into the daily Net Asset Value of the respective schemes.

The other provisions of the Circular with respect to norms for investment and disclosure by Mutual Funds will remain same.

[Circular No.: SEBI/HO/IMD/DF2/CIR/P/2019/17]



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