US Commodity Futures Trading Commission likely to okay NSE for derivatives

The National Stock Exchange (NSE) is close to receiving US regulator Commodity Futures Trading Commission's (CFTC's) approval that will enable a class of hedge funds deal on its derivatives platform.

Sources privy to the development said the exchange has already completed the formalities pertaining to the process and is expecting a 'no-action' letter from CFTC in the next few weeks.

The development would give a green light to US-based hedge funds, who currently opt for offshore platforms such as Singapore Exchange (SGX) to deal in Indian derivatives.

According to the US laws, funds which pool substantial amount of money from US citizens are allowed to invest only in derivatives that are approved by the CFTC.

The license-called 'foreign part 30'-allows exchanges and entities situated outside US to solicit and accept orders from US-based funds.

NSE had applied for the license more than three years ago, however, not much progress could be made before 2017 as Indian market regulator the Securities and Exchange Board of India (Sebi) did not have any information sharing agreements with the US regulators. Late last year, Sebi had signed a pact with US regulator Securities Exchange Commission (SEC) under the International Organization of Securities Commissions (Iosco) protocol.

"Most of the hurdles were cleared once the information sharing agreement between Sebi and SEC came in effect. The license will help India attract more US-based institutions to participate in India derivatives. We had extensive meetings with the CFTC officials in the last few months and are expecting the final approval very soon," said a source.

The development couldn't have come at a better time as Indian market regulator and intermediaries are making efforts to contain the export of Indian trading and also deepen futures market.

Also, the license was not typically a top priority for the Indian exchanges until recently. Since US hedge funds were not allowed to deal directly in Indian futures, they were using offshore destinations such as SGX to trade in Index futures. Those investors who wanted exposure to single stock futures used participatory notes (p-notes) to take an indirect exposure. 

In the final lap 

*  SENSE is in final stages of receiving CFTC’s licence that would allow US hedge funds to deal with Indian derivatives 

* The licence will allow several large-ticket US hedge funds who have been using offshore routes such as SGX to directly trade in Indian F&O 

* The development will help NSE to attract more big-ticket US investors to India and deepen domestic F&O market 

* The licence was stuck for several years as there was no information-sharing agreement between Sebi and US market regulators 

* Last year, Sebi signed the agreement with US SEC under Iosco Protocol

However, both the routes are no longer available for foreign investors. Last month, Indian stock exchanges terminated all the data sharing agreements with the foreign bourses. In other words, offshore exchanges will no longer be able to offer contracts based on domestic securities once the notice period ends in August. Earlier, Sebi had banned p-notes subscribers from investing in Indian derivative markets for any purposes other than hedging.

Interestingly, NSE's rival BSE is not far behind in the pursuit. Sources say BSE had applied for the same license already. It is also learnt that BSE is pursuing an advanced CFTC license which will also allow the exchange to set up its commercial terminals in the US.

Unlike India, the US market has dual regulator system wherein SEC largely controls equity space while commodities and derivatives are largely regulated by CFTC. Until 2002, single-stock futures were banned in the US markets. Subsequently, the US government allowed US-based funds to invest in single stock futures, both domestically and internationally, and the segment was brought under CFTC's purview.

In the aftermath of the Lehman crisis, the US government had constituted the Dodd-Frank committee to prescribe curbs on excessive risks taken by US banks and hedge funds. In line with the recommendations, the US markets regulator SEC, in collaboration with CFTC, brought a new framework of restrictions on the investments made by hedge funds in derivative markets.


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