Guidelines for Participation by Mutual Funds in Derivatives Trading

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....tives, certain types of transactions were explained with illustrative examples which may be considered as hedging and portfolio balancing. Association of Mutual Funds in India (AMFI) has made a representation for some more clarifications for hedging and portfolio balancing. After examining the matter, further clarifications are being issued, which are enclosed. These clarifications are being issued in accordance with the provisions of Regulation 77 of the SEBI (Mutual Funds) Regulations, 1996. Yours faithfully, SURESH GUPTA Guidelines for Participation by Mutual Funds in Derivatives Trading The mutual funds shall be required to adhere to the following guidelines for trading in derivatives: These guidelines apply to equity oriented s....

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....ees shall determine the overall exposure limit to derivatives, as well as the derivative limits on individual stocks. Trustees should satisfy themselves that the risk containment measures are in place. All the exposure limits in Table 1 (to be specified by the Board of Trustees) are in terms of notional value of the derivative position. The notional value of the derivative position for each specific instrument held is defined as: Options: Number of Contracts held (multiplied by) Number of underlying shares (multiplied by) strike price / (divided by) index per contract Futures: Number of Contracts held (multiplied by) Number of underlying shares / (divided by) index per contract (multiplied by) current or closing market price The gros....

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....150% of the permissible SEBI exposure limit position on either side. In addition to the above limits, the fund shall do a 'worst case scenario' exposure on the total positions on any given underlying. The worst-case scenario exposure to the underlying shall not exceed the SEBI exposure norms. The procedure for performing the worst-case analysis shall be similar to the one described in the SEBI letter dated 31st December 2002. 2. Positions Involving Multiple Derivatives: Positions involving multiple derivatives positions on the same underlying shall be allowed. The exposure limits for the same shall be fixed as above. 3. Disclosure and Accounting Norms: Each mutual fund shall disclose the maximum net derivatives exposure in terms of p....