Banks, insurers eye F&O for better returns

Domestic financial institutions such as banks and insurance companies have evinced interest to participate in the equity derivatives market as traders.

According to sources close to the development, major domestic banks and institutions such as State Bank of India (SBI), Bank of India (BoI) and Life Insurance Corporation (LIC) have sought the permission of their respective regulators - the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (Irda) to participate in the equity derivatives market (F&O segment) as traders.

Bankers explained that this would give them an opportunity to take advantage of the market conditions and earn good returns. At present, they can only enter the market to hedge their portfolios.

According to bankers, investment is also an important activity for efficient fund management, especially at a time when the credit offtake is slow and capital adequacy norms have been made stringent for various categories of loans under Basel-II.

Moreover, the participation of banks and insurance companies will build up a good domestic institutional support to the F&O segment, which till now is primarily a domain of foreign investors.

According to insurance companies, the participation in the equity F&O will give them an opportunity to take advantage of the market conditions and earn higher return through trading.

The F&O segment in the equity market is more volatile compared with the cash segment since there is no institutional support from the domestic counterparts as is the case with the cash market.

Therefore, the decision of portfolio investors (FIIs) results in a greater volatility in the market. Since the beginning of the financial year 2007-8 till now, while the turnover in the cash market has grown from Rs 5,938 crore (Rs 59.38 billion) to Rs 28,400 crore (Rs 284 billion), the F&O segment witnessed volumes growing from around Rs 20,000 crore (Rs 200 billion) to a high of Rs 1,10,563 crore (Rs 1105.63 billion).

Dealers explained that volumes in the F&O segment were much higher than those of the cash segment since the former did not require cash funding, but only a margin payment to a broker.

Depending on the position at the end of the contract period, transactions in the F&O were settled on a net basis, they added.