Ban on Mutual Funds to Sell options.

SEBI has banned all mutual Funds from Selling options. The takeaways of the circulars are

a) Any Asset Management Companies (AMC) or Mutual Funds cannot sell Options.

b) They cannot take positions more than its Net Assets even by buying options

c) Position taken in Derivatives segments, if hedge will lead to computation of Exposure for both sides (Eg. If a Fund is long on Futures and long on its put, both would be taken as different positions and not a hedging position

d) It expects AMC to give detailed six monthly reports on outstanding position held in derivatives position

SEBI came out with the order without taking any feedback from the Industry. There are several repercussions of the above order.

a) SEBI has bought these order as part of Risk Management of Mutual funds, but denying the opportunity to sell options completely is very harsh, there could have been limits, checks and additional margins to check excessive positions. 

b) The mandate of Mutual funds are Optimisation, The tools for optimisation, Leverage and Hedging is Derivatives. These tools are there in the market but unfortunately these tools are denied to specific class of Professionals thus denying opportunity to big class of investors who have kept their money in mutual funds and faith in the Professionalism of Fund Managers.

c) We all agree that trading in options needs Professional skill and Institutional players knows the Risks involved in taking positions in options(There is unlimited  loss in writing options) , whereas Individual players trading in options are more likely to have lesser or no knowledge of option trading . But still SEBI has deprived Mutual funds who are professionals. Individuals are allowed to trade in options after signing RDD (Risk Disclosure Documents) which says they are aware of risks of trading in derivatives.

d) The major players in option markets are Prop Desk, Mutual Funds and FII. (Insurance companies cannot trade). They provide liquidity and helps in price discovery process. With Mutual funds withdrawing  from selling options , FII would be in full charge of option positions (As Prop Desk are more involved in Delta Hedging and Arbitrage trade, also they have much lesser financial might compared to FII ) . It may also reduce liquidity in market in short run.

e) This ruling will be advantageous to FII, as they will be able to capture the market vacated by mutual funds, and they have natural advantage of taking positions and Hedging in overseas market (SGX, CME).

f) Instead of bringing  in complete ban SEBI should have come out with the names of mutual funds, whom they felt is taking risky bets by writing options and could have let the Investors in mutual funds decide about the risk.

g) SEBI is expecting Mutual funds to declare all their open position in their six monthly report as a measure of transparency, which in turn is also a threat to disclosing their open positions to the market, which can be disadvantageous and disastrous.

i) The points 7(d) and 9 are contradictory and needs clarity. 7(d) say you cannot hedge more quantity in underlying for position in Derivatives market and point 9 says excess quantity of position in derivatives market compared to cash market should be calculated for computation of Exposure. ( What about Delta hedge and Beta Hedge where the quantities would vary)

This order  is definitely against the Industry on the whole, Mutual funds are perceived to be professionals and SEBI wants to define them Rash and incapable. (Then should the Investors ever put money in mutual funds ? ), it is only paving way for bigger market share of FII and last but not the least it is a blow to investors of mutual funds and they are denied opportunity to optimise their returns on investments.

Trading of Options in Currency Derivatives

SEBI has given permission to exchanges to start trading of options on currency derivatives. Now it depends on the Exchanges the timing of introduction of products.

It is good on the part of RBI and SEBI to introduced  Options in currency segment, It will definitely boost the volumes and it will have many ramifications in the market.

a) It will boost volumes and opportunities in currency market.

b) Price discovery process of Exchange rate will be more smooth

c) Forex market in India will become more transparent  and huge volumes will move from OTC market to Derivatives market

d) It will give corporates a finer price to hedge.

e) Banks will be spared from allegation of Mis - Selling as corporates would be counter party to Exchange.

f) There will be more arbitrage opportunities

g) It will give opportunity to Importers and exporters to hedge their forex exposure

h) Indian Traders taking position in multi markets and multi products will find it easy to hedge their exposure in such market instead of OTC market.

The Salient features of the introduction of Options are

a) The option would be introduced on USD- INR only (As of now the permission is given to introduce options on American dollars only)

b) The options will be European options.

c) Options will be available in 3 serial monthly and 3 quarterly contracts

d) There will be at least 7 strikes (3-1-3) in each calendar month

e) The Options would be cash settled

f) The Final settlement price will be RBI reference rate.

g) Margins would be SPAN.

h) There will be margin benefit on calendar spread.

The mechanics are same as used on CDX market but we may need some clarity on certain issues

a) Would the margin be calculated on portfolio of (Futures and options both together) ?

b) There need to be clarity on issue of Stamp duty which is imposed in some states

It is a good move and we can expect to see trading in next 3 months

Sponsored ADR of Tata Motors Differential Voting Rights (DVR)

Sponsored ADR refers to issue of ADR, but not by the company but by its share holders (may be promoters). The proceeds of the sale of ADR goes to its shareholders who have tendered share in sponsored ADR. Also if the Tendering of shares are more than issue size, the shares are accepted on pro-rata basis.

Taking from our last blog on DVR ON 14th April, we know that as of now 3 companies have issued DVR (Tata Motors, Pantaloon Retail & Gujarat NRE Coke). They are traded in the range of 25% to 40 % discount to equity price. Such huge discount in price is uncalled for and such steep discount should evaporate in long run.

Tata Motors is exploring the option of issuing sponsored ADR for its DVR, Internationally discount on DVR is not more than 20 % and as low as 5 %. Tata may be intending to sell part of its holding in such sponsored ADR. It is a right move for Tatas to sell their stake as they will get better price and there will be no impact in its stock price.

But I doubt about the pricing of the DVR, ADR may at the best be able to command 15% discount to its stock price. Looking at the returns from current price there is at the most 10% to 12% to be made from this price.

Infosys have done a successful Sponsored ADR, but in their case, the scenario was that ADR was already quoting at huge premium and there was huge appetite for Infosys stock, The returns were simple to calculate.

Tatas may be successful in selling their stake but there is no big money left on the table to be made.for  retail  Investors or Traders. Let us understand the scenarios.

 a) If such exercise is started it will take at least 6 months to materialise, (Getting the Book Runners, getting statutory permission in both countries, Notice to Investor, Placement with Clients and then distribution of Funds)

b) There will be cost of carry for such period.

c) There is probability of price going up as well as down, (Upside looks blink, Downside as Tata Motor is also looking for issue of Rights and Placements)

d)  Hedging the price risk is concern as Futures price of TELCO is known to move between Backwardation and Contagion.

e) Till that time you may be exposed to Exchange rate risk also.

 f) 15% Discount to spot price of TELCO is a best case Scenario, there can be steeper discount.

Current price of Telco is around 830/- and Hypothetically if they are able to place the DVR at 15 % discount the Price would be 705/-. Current DVR price is more than Rs 600/- . So there is 100 Rs on the table. but if we consider the cost of carry for 6 months the Interest cost would be Rs 35/-. That apart there will be Exchange rate risk and there can be more downside if Rollover is done in backwardation.

There is also no antecedence in India about corporate announcement in such DVR, Take a case If Tata comes with right of TELCO shares in futures, Would DVR holder be allowed to participate and How would they be allowed to participate. Such things do not have antecedence which will lead to bigger discount on DVR till such things are sorted out.

Overall, It is not worthy to Invest in Tata DVR with a view to sell in Sponsored ADR, but if you are bullish on TELCO , Yes, it is a good bet as Downside would be lesser and upside would be more in percentage terms.

Introduction of Options in Currency Market.

RBI has given permission to Exchange to introduce Rupee/ Dollar options. With this matter of time , introduction of Currency option seems imminent.

NCDEX & MCX have recently introduce other currency for trading (EURO, YEN & Pound) making these market very liquid. In fact the volumes on these exchange are more than Equity cash market.

It is worth looking at this market, because

a) Volumes are huge.

b) The   trading is volatile & spreads are very narrow

c) The trading cost is very low

d) With introduction of Options, Many other players will enter the market

e) Volumes will move from OTC market to this market

f) These operations are part of many bank treasuries

g) There wont be any STT in these markets

Considering the above reason,

a) Scalping is possible, by giving both bid - ask rates

b) These market cannot be manipulated hence we can trade on Macros

c) Arbitrage can be big business with many players, Depth & Lesser Costs.

         It can include i) Normal carrying of underlying ii) Calendar Spreads iii) Delta strategies

         iv) Arb between NSE FX & MCX SX v) Abr between FX in Indian market & NDF in Singapore

d) Algorithm trading is possible & could give better results

    

But It would be like pitching against Goliath's which are banks who have the might of Money, Infrastructure & also better access to orders in spot markets. But they are better equipped to trade on Phone rather than Machine

Differential Voting Right (DVR)

SEBI has given nod for issue of Differential voting Rights, synonymn to different classes of shares in many developed countries.

Internationally such DVR trade at a discount to share price, but the dicount is not very steep. The discount is arount 5 % to 10 % in European countries & not more than 20 % in US.

These products if the voting rights are less , than the dividend is little higher or the returns are more sweetened than normal equity.

There are 2 companies listed companies who have issues shares with differential voting rights. They are TELCO & Pantaloon retail.

Both DVR has not performed in tandem with its share price, hence Investors who are bullish on underlying can bet on DVR as it will have lower downside.

It is not advisable to do arbitrage between DVR and underlying ie buy DVR & sell the stock futures, because the price discovery between CASH & DVR may take a longer time.

Guj NRE Coke has also decided to issue right DVR & Bonus DVR , but the dates are not fixed.

Demerger of Regional channel from ZEE News

Regional channels are getting demerged from zee news and the same is getting mergered with zee tele.

The ratio of merger with zee is 19 : 4 ie the shareholer of Zee news will get 4 shares of Zee tele also he will own the shares of zee news which will have news channel in it.

I expect the base valuation of zee news after demerger to be Rs 20/-. Also the demerger date will be announced soon as the scheme is sanctioned by various courts.

There is an arbitrage opportunity between Zeenews & Zeetele as you can buy zee news befor bookclosure & sell zee tele futures.

Buy ZEE News                 6650           62.50              415625
Sell ZEE tele futures         -1400         265.00             371000

Residual cost of ZEE news   6650                               44625
ie cost of each share is RS 6.72

and I value Zee news post demerger at Rs 20 /-