Mumbai: The market regulator SEBI has made some significant changes to the position limits of FIIs, mutual funds and trading members. Mutual funds and FIIs can now double their exposure to Index futures.
Deven Choksey of KR Choksey Securities, Sanjiv Shah of Benchmark Asset Management and Yuvraj Sehgal of Brics Securities give their views on this development.
Deven Choksey believes that market volatility will be under control due to these changes. Sanjiv Shah feels that this news will not have any major impact on mutual funds at this point in time. Yuvraj Sehgal says that due to these changes, it won't be surprising to see institutional players actually start moving 20-25 per cent of the market.
Exclusive interview with Deven Choksey, Sanjiv Shah and Yuvraj Sehgal:
Q: Will this lead to less volatility in the market?
Sehgal: Definitely, Index futures is one product, which should be traded wherein one could expect more volume. When the levels were at around Rs 250 crore, they were actually limiting the market and even Rs 500 crore would actually limit the market because this is one product, which will not cause any volatility.
This is one product, which is a good hedge product to any mutual fund or any hedge fund or any long-only fund, which would be using it very often. So as much as they keep increasing, one will see the volumes happening over there.
Q: Does it also open up the market a little if you want to play through options?
Sehgal: It does, the Index option market, particularly the Nifty option market, has been multiplying. When they had increased the limits there, we saw the open interest actually touching around Rs 200-250 crore. The best part is the way it goes in the stock futures case, where one has a direct exposure to the stock, it can actually affect the stock.
It does not affect when one has an exposure on the Nifty because in general, one may not have an underlying exposure on the Nifty in the cash side. So definitely, it has a lot of effect, wherein we will see huge volumes happening.
Q: For a fund manager, who wants to hedge his positions by taking that position on the Nifty, does this give you more elbow room?
Shah: To be honest, at this point in time, most of the Indian mutual funds haven’t even reached the size, which you are talking about, of Rs 250 crore. But that is in present situation. In the future, I have a firm belief that the Indian mutual fund industry will be pretty large and a Rs 500 crore limit for a fund house will become smaller.
But SEBI has actually gone ahead and moved it from Rs 250 crore to Rs 500 crore. The ability for mutual funds to come out with new products, which we haven’t seen in the market increases substantially.
One can play the Index futures and options market without worrying that we might have a capacity gap that has taken off, thanks to the new changes, which have been done by SEBI.
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Q: Does this mean that there isn’t much impact because any way, most of the mutual funds haven’t yet hit that early Rs 250 crore mark but the levy is good news?
Shah: That is correct. It allows all the mutual funds to think that maybe we are missing out and come out with new product, which actually takes advantage of the open positions that are allowed for mutual funds in the market. To answer your question, there will be no major impact at this point in time.
Q: What about the changes for single stock futures?
Choksey: It will be largely beneficial. This Rs 250 crore, which has been expanded to Rs 500 crore, the artificial square off, which used to take place, the resultant impact on the cost in the contract subsequently because of the higher margin, will get cooled off and probably it will help a lot.
In my viewpoint, over a period of time, the impact would be seen larger; of course, one needs to calculate the actual data based on the calculation that they are suggesting now, which is between 20 per cent free float and the average traded volume of past month.
The average traded volume of past month is done away with to a great extent, when the negative impact is to be seen. So to a great extent, it will be beneficial. Some of the companies where the free float is less, one will have to workout the actual calculation. But on the whole it sounds and appears to be positive.
Q: As you said, a lot of the artificiality will be removed. So will it lead to lesser volatility or will that continue?
Choksey: In my viewpoint, in the shorter-term, it will continue and in the longer-term, one will have to actually see how it pans out. But overall, it seems that the volatility will be under control, it would not be, as we have seen in the past.
Q: What happened to the illiquid stocks now?
Choksey: As I said, for Wipro or ONGC, the float is comparatively less, but the market capitalization is high. So, to a certain extent, we will have to work out the impact based on the previous regulation which stated that on certain occasions one has to look at the volume impact of the previous month or so.
But as it appears now, the 20 per cent criteria is definitely going to be beneficial because it will bring in lot of consistency irrespective of the lull in the markets or volumes in the earlier months.
Q: Are there any parallels that you can draw between the derivatives positions now and what it was in May? Would a move like this actually have helped the situation in May?
Sehgal: Quite probably so. We are probably at about 60-70 per cent of the open interest compared to what we were there in May. But we have to remember that we have four new stocks in this month. So that is actually anyway adding, which we did not have in May. But yes, had it happened in May or much before that, we could have seen much higher levels of open interest in May itself.
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Q: Talking about the positions now as opposed to the positions in May, do you agree with the fact that this time the percentage of Nifty futures is far stronger than it was in May?
Sehgal: Yes, I would definitely agree on that point. At that point of time there was huge amounts of cost of carry. So I would agree with you.
Q: For someone running an Index arbitrage fund, how much of a plus would this be?
Shah: At this point in time there is no major difference, but in the long run it will be great. To be honest, the biggest advantage that has happened for anyone running an Index arbitrage, is the four new securities which were brought in the last 15 days. That has removed our basis risk for taking arbitrage between Index future and the underline stocks because we had stock futures.
So all in all, the development that we are seeing is good. You will see a higher amount of open interest build-up in the stock futures especially, Index futures again Rs 250 to Rs 500 crore.
My gut feel is that in a year's time we should really be surprised to see people like us and possibly other FIIs trade much more in the derivatives market, given this opening. As of today, if you look at the open interest, it is pretty large.
But if you look at the total volumes, the institutional players are pretty small in that sense; not more than about 10-11 per cent. Hopefully, thanks to all these changes, we won't be surprised if they actually start moving to 20-25 per cent of the market.
Q: You said that fund houses could look at new products in the F&O space. What kind of new products can investor expect?
Shah: Last year, when SEBI allowed mutual funds to look at the derivatives market more liberally, people like us had put-in documents which would do Index arbitrage, which would take advantage of volatilities in the market, and try and do covered calls.
People like us don’t deal in products such as pair trading, buying and selling of certain stocks in the futures market because we do not have to worry about limits. So with this, our ability to trade in the market will go up substantially. So these kinds of products will come in more aggressively and don’t be surprised if you see more players coming into this market.
Q: Final word on the market and how rollover etc is shaping up for this series itself?
Choksey: Until now, as per the figures we saw, things are quite comfortable. We might see a further rollover in the next three-four days. In my opinion, the market is going to be sideways, at the same time we are going to be optimistically looking at some of the numbers, which are going to be coming out from the corporates.
So to a great extent, we believe that the rollover should be successful. People would be waiting for the earning season, and maybe a month thereafter we would be able to determine the trend for the second half of the year.
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