Dealers fear Indian equity derivatives buyers may be scared off by an unexpected move banning major player UBS from issuing off-shore derivatives on Indian underlying for one year. The market has been red hot over the last year (DW, 3/4), but officials say until a clearer picture of the Securities and Exchange Board of India case emerges, rattled clients may hold off on entering new positions. "In the short-term there will be a lot of soul-searching and ensuring that everything is in order. In the longer-term SEBI needs to reassure the market that this is not a broader anti-foreign investor witch hunt," said one senior trader in the region.
SEBI said UBS, one of the largest structurers of Indian equity-linked products, has been banned for failure to fully cooperate with regulators and disclose offshore equity derivatives positions. Such offshore derivative trades are hedged via onshore positions in the Indian market which fall under the eye of the regulator.
Mark Panday, spokesman for UBS in Hong Kong, told DW, "Complying with the order, UBS has ceased issuing derivatives constructed against underlying Indian securities held by UBS in the Indian securities market immediately." He continued, "UBS does not believe that the description of its conduct or intent as contained in the judgment is fair. UBS is seeking further legal advice and intends to appeal the regulator's decision." G. Anantharaman, member of SEBI in Mumbai, and author of the 60-page report by the board concerning UBS, did not return messages by press time.
The dispute arises from a large drop in the Indian stock market last May, in which SEBI contends UBS played a key part and was among the top sellers in the market, pressuring a selloff not linked to fundamentals. Subsequently the regulator requested information of the ultimate end-users from such positions. SEBI states UBS was slow to provide client information and did not fully disclose requested details, such as the names and addresses of the largest stakeholders of investment funds which were the beneficiaries of such trades.
"It seems like the Indian regulators weren't buying that UBS was cooperating with them," said an equity head at a rival bulge bracket house in Hong Kong. So-called market access products on Indian underlying--multi-billion dollar business for investment houses--were employed. These contracts provide synthetic exposure to off-shore entities and are hedged via onshore positions held by firms.
Equity officials noted market manipulation is difficult to prove and during that time last year a new coalition government was brought in to power which likely triggered uncertainty in the market and the sell-off. Therefore, they explained the SEBI report instead focuses more on UBS hindering the investigation and failing to fully disclose client information, which end users such as hedge funds may have been unwilling to give to the European bank.
