Sebi to finalise guidelines to allow MFs to invest in commodity derivatives

To increase the institutional participation in the commodity segment, Sebi on Thursday said it will soon finalise the guidelines to allow mutual funds (MFs) to invest in commodity derivatives segment.

The markets regulator said it will also frame warehousing norms for non-agriculture commodities and will consider allowing 'indices' once its robustness is established by the bourses.

Addressing an Assocham event here, head of Commodity Derivatives Market Regulation Department (CDMRD) in SEBI, P K Bindlish said the commodity derivatives market is still faced with challenges even though the trading volumes have risen up to Rs 100 trillion.

To increase participation, SEBI is now moving towards allowing mutual funds. "We are working on finalising the guidelines at the earliest," he said.

On allowing more products, he said 'indices' will be considered after knowing its robustness.

The 'option' trading in commodity derivatives market has already been allowed with MCX launching it in five commodities and NCDEX in one commodity. "More commodities will be considered after seeing their success," he said.

To strengthen warehousing, the regulator will soon come out with warehousing norms for non-agri commodities also, he said.

"Warehousing Development and Regulatory Authority (WDRA) has done a good job for agri commodities. But for non-agri, there is no regulation and guidelines from WDRA. We will come out with norms soon," he added.

Emphasising on the need to have a strong settlement mechanism, the Sebi official further said the exchanges have been asked to put in place their trading corporation for settlement purpose from October. 

"At present, the settlement is done by exchanges themselves. World over, it is done by trading corporation. I am happy to share that already one of the exchanges has made a proposal for a trading corporation and I think they will be getting soon. The other exchanges are in the process," he said.

On the integration of commodity and equity markets, Shashank Saksena, adviser (financial markets) in the Finance Ministry, said: "We have integrated at the level of regulator and market institutions. We are still far away at the level of participants."

There is a need to work together to increase the number of participants. That's how the depth of the market and liquidity will improve, he said.

The exchanges have been allowed to integrate commodity and equity derivatives by October 1 in order to boost participation, hedging and better price realisation.

Since the basic function of the commodity derivatives market is to provide price signal and hedging efficiency, the official said there is an empirical evidence that as far as price signal is concerned, markets do provide signal to spot market.

There is no hedging effectiveness due to lack of integration between spot and futures market, he said, adding that a committee has submitted a report in this regard.

"The report of the committee is out. Now, we have to work towards creating policy framework to remove impediments and complete the integration of the two markets," he added.