Nishanth Vasudevan & Ashish Rukhaiyar
ET NOW
July 1, 2009
THE Securities and Exchange Board of India’s (Sebi) initial plan to allow foreign institutions to use ‘AAA’-rated foreign sovereign securities, mainly US Treasury, as collateral towards margin payments in equity derivatives may not take off, at least immediately. This is because existing US regulations do not allow the method of using America’s treasury paper as collateral, as required by Indian authorities.
As part of this arrangement, foreign institutions, which wanted to take exposure to India’s futures and options segment with US treasury bills as collateral, were required to tender these securities to Sebi-registered clearing members, which handle trades on behalf of foreign institutions.
This was part of the agreement between the clearing member and foreign institution, where the clearing member had the authority to liquidate pledged securities in the event of the institution going belly up. The sovereign paper were to be treated as cash. The clearing member, in turn, would pledge securities with the clearing corporation — an entity that works with exchanges to handle confirmation, delivery and settlement of transactions — of domestic stock exchanges.
People familiar with the matter said this method of using US treasury paper as collateral amounted to ‘double pledging’. “The existing US regulatory regime does not allow their treasury papers to be double pledged, which has hindered the process from kicking off,” said a Sebi official.
The move to permit foreign institutions to use top-rated foreign government securities, as collateral to fund margin requirements, was aimed at enabling them to increase their activity in the domestic futures and options segment. Now, they are required to make their margin payments in cash. The step would have allowed these institutions to put to use their idle holdings in any of the top-rated government securities.
Top officials at global custody service providers said this move would have allowed foreign institutions, which are yet to recover from the cash crunch after the US credit crisis, use their treasury holdings to bet on Indian market.
It is felt that the arrangement can take off only if there is more rationalisation in the Indian and US norms. “Maybe, the clearing corporation can become direct members of the public debt office (PDO) of the US,” said a top official at a global custody service provider. PDO borrows money needed for the US government and accounts for the resulting debt. It borrows by selling treasury bills, notes and bonds as well as US savings bonds.
As of now, the Reserve Bank of India has allowed clearing corporations and members to maintain demat accounts only with foreign depositories to pledge or transfer such securities as collateral.
ET NOW
July 1, 2009
THE Securities and Exchange Board of India’s (Sebi) initial plan to allow foreign institutions to use ‘AAA’-rated foreign sovereign securities, mainly US Treasury, as collateral towards margin payments in equity derivatives may not take off, at least immediately. This is because existing US regulations do not allow the method of using America’s treasury paper as collateral, as required by Indian authorities.
As part of this arrangement, foreign institutions, which wanted to take exposure to India’s futures and options segment with US treasury bills as collateral, were required to tender these securities to Sebi-registered clearing members, which handle trades on behalf of foreign institutions.
This was part of the agreement between the clearing member and foreign institution, where the clearing member had the authority to liquidate pledged securities in the event of the institution going belly up. The sovereign paper were to be treated as cash. The clearing member, in turn, would pledge securities with the clearing corporation — an entity that works with exchanges to handle confirmation, delivery and settlement of transactions — of domestic stock exchanges.
People familiar with the matter said this method of using US treasury paper as collateral amounted to ‘double pledging’. “The existing US regulatory regime does not allow their treasury papers to be double pledged, which has hindered the process from kicking off,” said a Sebi official.
The move to permit foreign institutions to use top-rated foreign government securities, as collateral to fund margin requirements, was aimed at enabling them to increase their activity in the domestic futures and options segment. Now, they are required to make their margin payments in cash. The step would have allowed these institutions to put to use their idle holdings in any of the top-rated government securities.
Top officials at global custody service providers said this move would have allowed foreign institutions, which are yet to recover from the cash crunch after the US credit crisis, use their treasury holdings to bet on Indian market.
It is felt that the arrangement can take off only if there is more rationalisation in the Indian and US norms. “Maybe, the clearing corporation can become direct members of the public debt office (PDO) of the US,” said a top official at a global custody service provider. PDO borrows money needed for the US government and accounts for the resulting debt. It borrows by selling treasury bills, notes and bonds as well as US savings bonds.
As of now, the Reserve Bank of India has allowed clearing corporations and members to maintain demat accounts only with foreign depositories to pledge or transfer such securities as collateral.
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