FMC for barring banks from gold ETFs

Past proposals to launch silver, oil ETFs were also not allowed.

Gold exchange-traded funds (ETFs) are under the scanner of the Forward Markets Commission (FMC), the commodity futures market regulator. FMC plans to ask the Reserve Bank of India (RBI) to stop banks from investing in gold ETFs.

A month ago, at a meeting of RBI’s standing committee on gold, banks sought permission to invest in ETFs, besides more flexibility in gold trading.

In response, FMC is taking up the issue with the central bank, saying gold trading is its domain, not that of stock markets, as the metal is a commodity. It is also arguing that since banks are not allowed to even hedge on commodity futures exchanges, there is no justification in allowing them to invest in an instrument having gold as the underlying.

FMC Chairman B C Khatua said, “Any ETF where the underlying asset is a commodity falls under the domain of the Forward Contract Regulation Act (FCRA). We will take up the issue of banks’ investment in gold ETFs with RBI.”

A couple of months ago, FMC had objected when the Securities and Exchange Board of India (Sebi) permitted the National Stock Exchange (NSE) to start options trading in gold ETFs. It said options were not allowed in the commodity futures market. NSE had dropped the plan.

Previous proposals to launch ETFs based on silver and crude oil were also not allowed.

A decision has since been taken to give an autonomous status to FMC. Once the bill amending the FCR Act is passed and FMC gets enough powers, its chairman will find place on the Sebi board and Sebi’s chairman on the FMC board. The issue of who will regulate commodity-based ETFs is expected to be sorted out after that.