Offshore India derivative bets face heat

Mumbai: Holders of offshore derivative instruments (ODIs) used to bet on Indian stocks are facing heat from losses incurred by global investment banks in the Archegos Capital blowup. The banks are asking hedge funds with exposure to local markets through these derivatives to bolster margins for positions, said three people with direct knowledge of the matter. This means the hedge fund needs to provide additional security in the form of cash or collateral to these brokers, failing which they can liquidate client positions.The trigger for the fresh demand for more security is the debacle at Archegos. Margin calls on the hedge fund resulted in banks such as Nomura, Credit Suisse, Goldman Sachs dumping shares worth $20 billion held by the investment manager, causing losses to many of them. The default has sharpened market volatility with several large banks reevaluating risk-management practices and cutting their losses.“Lots of hedge funds with exposure to Asia are getting demands for more margins from their brokers. This has certainly caught the hedge fund industry off guard," said a senior official with a Hong Kong-based fund. "The problem is it is impossible to ascertain the potential impact since there is little public data on the subject.”Over-the-counter TradesIn normal cash and derivative market transactions, the investor buys the securities directly but offshore derivative instruments (ODIs) operate differently. Foreign banks buy securities on their books and then issue ODIs such as participatory notes (P-notes) against such securities to investors. This allows the third-party investors to take on exposure in India without having to seek regulatory approvals or licences.A portion of such synthetic exposure to India is reported under the P-note regime. Market participants said a large part of ODI transactions are over-the-counter (OTC) or bilateral trades. While the underlying rationale behind these bets is common, the terms are tailormade.At the crux of the matter is highly leveraged trades made by hedge funds. Foreign banks are worried that the crisis at Archegos could spread and trigger further defaults.“The risk of default by a hedge fund is significantly higher currently than what it was say two weeks back and hence banks have no other option but to enhance the margins or offload the positions,” said a top executive at a leading P-note issuer in India.81770239

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