MCA for allowing banks as aggregators on commexes

The ministry of consumer affairs has written to the finance ministry suggesting that banks be allowed as aggregators on commodity exchanges.

While the Reserve Bank of India (RBI) is still deliberating on the issue of allowing banks as direct hedgers in the commodities market (as institutional traders), MCA feels banks can be allowed to play the role of aggregator hedgers to increase volumes.

An aggregator is one who aggregates others’ risk and hedges on their behalf as an institution. “Banks lend to commodity traders and companies dealing in commodities and, thus, they have a better idea of the risks emerging from a genuine commodity position.

It does not require any amendment (in banking laws), since banks are not required to take any positions on their own books or proprietary positions. They will take a position on behalf of others,” said official sources.

Thus, there will be no risks passed directly to the books of the banks, explained sources. According to officials, the RBI has strong reservations, as allowing banks as hedgers could increase proprietary risks in a different asset class — commodities.

This would also require an amendment in the Banking Regulation Act. Recently, the commerce ministry relaxed the norms for foreign institutional investors to invest in commodity exchanges.

Earlier, an foreign institutional investor had to take the prior approval of the Foreign Investment Promotion Board (FIPB) before picking a stake on any commodity exchange. Albeit, the foreign direct investment in commodity exchanges will continue to need prior FIPB approval.

The standing parliamentary committee on food and consumer affairs has already favoured a bigger role for banks in the commodity market as they are inherently commodity financers.

The parliamentary report has suggested allowing banks as hegders and traders in the commodity market. The Abhijit Sen committee favours allowing banks and financial institutions to participate on commodity derivatives platforms. The Forward Markets Commission is working on increasing the hedger's exemption limit for maintaining open interest in the commodity futures market.

The open interest is maintained by entities hedging their actual commodity holdings with positions in the futures market.

This forms part of the regulator’s move to increase the number of hedgers in the market. Actual holding here is the distinction, as against speculators who take positions in the futures market purely as a trading and investment interest, with holdings not backed by actual quantities of a commodity.