US regulator likely to okay NSE for derivatives

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

The exchange has already completed the formalities pertaining to the process and is expecting a ‘no-action’ letter from the CFTC in the next few weeks, sources in the know said.

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

According to 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 licence — called ‘foreign part 30’ — allows exchanges and entities situated outside the US to solicit and accept orders from US-based funds.

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

“Most of the hurdles were cleared once the informationsharing agreement between Sebi and the SEC came into effect. The licence will help India attract more US-based

institutions to participate in India derivatives. We had extensive meetings with CFTC officials in the past few months and are expecting the final approval very soon,” said a source.

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

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

However, both the routes are no longer available for foreign investors. Last month, Indian bourses terminated all data-sharing agreements with the foreign exchanges. 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 the Indian derivatives markets for any purposes other than hedging.

Also, the BSE is not far behind in the pursuit. Sources said the BSE had applied for the same licence. It is also learnt that the bourses is pursuing an advanced CFTC licence that will also allow it to set up its commercial terminals in the US.

Unlike India, the US market has a dual regulator system, wherein the SEC largely controls equity space, while commodities and derivatives are largely regulated by the CFTC. Until 2002, single-stock futures were banned in the US. Subsequently, the US government allowed US-based funds to invest in single-stock futures, both domestically and internationally, and the segment was brought under the 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 the US banks and hedge funds. In line with the recommendations, the SEC — the US markets regulator — in collaboration with the CFTC, brought in a new framework of restrictions on the investments made by hedge funds in the derivatives markets.