AIF category 3 -F&O Margin allowed?

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As per the SEBI Circular (CIR/IMD/DF/10/2013) -

3.4 Prudential requirements

All Category III AIFs which undertake leverage, whether through investment in derivatives or by borrowing or by any other means shall comply with the following prudential requirements:

     i. For the purpose of arriving at leverage undertaken by an AIF, leverage shall be calculated as the ratio of the exposure to the Net Asset Value of the AIF.

     ii. Leverage shall be calculated as under:

       Leverage =Total exposure {Longs+Shorts (after offsetting as permitted)} / Net Asset Value (NAV)

     iii. The leverage of a Category III AIF shall not exceed 2 times of the NAV of the fund. i.e. If an AIF’s NAV is Rs. 100 crore, its exposure (Longs+shorts) after offsetting positions as permitted shall not exceed Rs. 200 crore.

Calculation of exposure and NAV

     i. The total exposure of the fund for the purpose of computing leverage shall generally be the sum of the market value of all the securities/ contracts held by the fund. The total exposure at any point of time will be a sum of exposure through instruments in both the spot market and the derivative market.

     ii. Exposure shall generally be calculated as below:

  1. Futures (long and short)= Futures Price * Lot Size * Number of Contracts
  2. Options bought= Option Premium Paid * Lot Size * Number of Contracts
  3. Options sold= Market price of underlying * Lot size * Number of Contracts
  4. In case of any other derivative exposure, the exposure is proposed to be calculated as the notional market value of the contract

     iii. Idle cash and cash equivalents shall not be included in the calculation of total exposure. Long put positions shall be considered as short exposure and short put positions shall be considered as long exposure. Short selling of a stock through SLBM shall be treated as short exposure. Temporary borrowing arrangements which relate to and are fully covered by capital commitments from investors need not be included in calculation of leverage.

     iv. Offsetting of positions shall be allowed for calculation of leverage for transactions entered into for hedging and portfolio rebalancing as provided in the circular No. MFD/CIR/21/ 25467/2002 dated December 31, 2002 and to the extent as specified in the circular.

     v. Sum of all exposures without offsetting transactions for hedging and portfolio rebalancing shall be termed as ‘gross exposure’ and the ratio of such gross exposure and Net Asset Value shall be termed as ‘gross leverage’.

     vi. Net Asset Value (NAV) of the AIF shall be the sum of value of all securities adjusted for Mark to market gains/losses (including cash and cash equivalents). The NAV shall exclude any funds borrowed by the AIF.

     vii. All the above restrictions/limits shall apply at the scheme-level.

For further reading, check this article.

Also, recently AIFs set up in IFSC (aka GIFT City) were exempt from these limitations -

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