Sebi allows mutual funds' entry into commodity derivatives market

Clears role of custodians which paves the way for individual investors entry through AIF route

Markets regulator the Securities and Exchange Board of India (Sebi) has allowed mutual funds’ entry into commodity derivatives markets on Wednesday.

The Sebi board met here on Wednesday to discuss various issues including the impediments faced by the alternate investment funds (AIFs) for underlying commodities for trading in commodity derivatives.

“The board discussed the proposal for allowing custodial services in goods underlying commodity derivative contracts in order to enable participation of institutional investors in commodity derivatives market. In this regard, the board approved the proposed amendments to the Sebi (Custodian of Securities) Regulations, 1996,” the Sebi chairman Ajay Tyagi said on Wednesday.

In June 2017, the markets regulator had allowed entry of category III hedge funds i.e. AIF into the commodity derivatives market. But, they could not enter into commodity futures due to the lack of clarity for the treatment of underlying commodities in the hedged position.

“By allowing custodial services in community derivatives, Sebi has taken one more step to strengthen the infrastructure of the commodity markets. Such measures are building blocks which will pave the way to institutional participation from mutual funds. In commodity derivatives market, Sebi is taking all those steps which it had taken while developing the Indian capital market more than two decades back,” said Sanjit Prasad, managing director and chief executive officer, Indian Commodity Exchange (ICEX).

“Sebi’s decision to amend Sebi (Custodian of Securities) Regulations, 1996 will allow small players to hedge their commodity risk through mutual funds. Until now, traders were allowed only through direct membership,” said Kishore Narne, Associate Director (commodities and currencies), Motilal Oswal Financial Services Ltd.

Market players have welcomed the move which they think would deepen commodity derivatives market further.

“Commodity futures market was waiting for participation from institutional players since long. The regulator’s move to allow mutual fund would increase participation, in addition to a sharp jump in volume and turnover in commodity derivatives,” said Naveen Mathur, Director, Anand Rathi Shares and Stockbrokers Ltd.

With this, now the definition of commodities has also changed. Like commodity futures markets are known as securities markets after merger of then Forward Markets Commission (FMC) with Sebi, now the ‘commodities’ would be known as ‘securities.’

“The change in definition would prove a game changer for commodities futures markets. Until ‘badla’ business was done at 15-17 per cent in commodities market which would now come at par with securities at 7 per cent,” Sumesh Parasrampuria, Group Chief Executive Officer, Kunwarji Group.