What changed
Previously, FIIs could only offer cash and AAA-rated foreign sovereign securities as collateral for derivative segment trades. Now, they can also use domestic government securities (acquired under FEMA 20/2000) and AAA-rated foreign sovereign securities as collateral for cash segment transactions, subject to SEBI's overall limit of USD 5 billion for domestic G-Secs. Cross-margining of these G-Secs between cash and derivative segments is not allowed.
What it means for you
This expands the collateral options for FIIs in the cash market, potentially increasing their participation and liquidity. Banks acting as authorized dealers must update their collateral management processes and ensure clients understand the new eligible instruments and the cross-margining restriction. The move aligns with SEBI norms and aims to deepen the government securities market.
What you must do
- Update internal systems to accept domestic government securities and AAA-rated foreign sovereign bonds as collateral for FII cash segment transactions.
- Inform FII clients about the new collateral options and the prohibition on cross-margining between cash and derivative segments.
- Monitor compliance with the USD 5 billion overall limit set by SEBI for domestic G-Sec collateral.
- Coordinate with stock exchanges and SEBI for operational guidelines once issued.
Who it affects
Category-I Authorised Dealer banks, Foreign Institutional Investors (FIIs), Recognized stock exchanges in India
Can FIIs use the same domestic government securities as collateral for both cash and derivative segments?
No, cross-margining of government securities between cash and derivative segments is not allowed. Each segment must have separate collateral arrangements.
What is the limit for domestic government securities that FIIs can pledge as collateral?
The overall limit is USD 5 billion, as specified by SEBI from time to time. FIIs must ensure their collateral stays within this cap.
Are there any changes to collateral rules for the derivative segment?
No, the existing guidelines for FII collateral in the derivative segment remain unchanged. Only cash segment rules are expanded.