Banks to start trade in commodity derivatives soon, eye exchange membership

Begin feasibility study, even as Sebi and commexes start work on evolving new set of trading members and new group of products

Following the Reserve Bank of India (RBI)’S decision allowing banks to  participate in commodity derivatives last week (except on their own account), both private and public sector banks have started feasibility study of the business and are also exploring taking membership on commodity exchanges.

Informed sources said both private and public sector banks have held several rounds of talks with officials of leading commodity exchanges to understand the nature of commodities and the factors that drive their prices in physical and futures markets. Understandably, banks are keen to start trading in select non-agricultural and a few agricultural commodities till they get tuned with futures markets before commencing full-fledged trading in this newly-opened segment for them.

Both commodity exchanges and their erstwhile regulator, the Forward Markets Commission (FMC), had been vouching for market enablers such as banks and financial institutions (FIs) to be allowed to trade in commodity futures since their relaunch in 2002. But the government was waiting to put in place a strong regulator before granting such permission. Finally, the merger of FMC with the Securities and Exchange Board of India (Sebi) in September 2015 ensured the strong regulatory control. However, the RBI amended its guidelines last week, allowing banks to offer commodity derivative products through their subsidiaries currently dealing in financial products, that is, securities.

"Currently we are doing a feasibility study that includes the approvals we need - both internally and from the regulators. As of now, we do not have a date for commodity trading commencement," said spokesperson of HDFC Securities, a subsidiary of HDFC Bank.

About three months ago, Sebi had allowed Category-III hedge funds to trade in commodity futures to deepen the market.

Sources said other banks in the private sector and some government-owned ones have approached exchanges to get details of commodity derivative products and the modes of exchanges' operations.

According to a senior exchange official who was a part of the discussion,  banks are enthusiastic about commodity derivatives with a caution about frequent change in government policies with regard to their domestic availability and import-export norms.

"Discussions are at an advanced stage. We hope banks will get exchange membership soon," said the exchange official.

Meanwhile, both the regulator and commodity exchanges are working together to bring in more participation in commodity derivatives through introduction of a new set of products and participants. Speaking on the sidelines of a Ficci seminar last week, Sebi executive director S K Mohanty, said, "A new set of products and participants is required for strengthening the commodity futures market. We have allowed 'options' in commodities. In order to deepen the (commodity futures) market further we are at an advanced stage of discussions to allow mutual funds' participation in commodities."

Sebi has allowed options trading in gold on MCX and guar on NCDEX.

"A new set of trading members are needed along with a new group of products. We are confident that such initiatives would add to commodity futures' volume exponentially," said Mrugank Paranjape, Managing Director, MCX, last week while launching indices on the MCX platform.