Hedge Funds May Pave The Way For FPIs In Commodity Derivatives, Says MCX
MXC says nod for hedge funds in commodity markets a good beginning.
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The head of India’s largest commodity exchange said that the market regulator’s decision to allow hedge funds to invest in commodity derivatives may eventually pave the way for foreign portfolio investors.
“It is a beginning. This is the first institution class of participation to be allowed in commodity trading,” said Mrugank Paranjape, managing director and chief executive officer at Multi Commodity Exchange of India Ltd., the world’s sixth largest commodity bourse. It will hopefully prove to be good, and lead to the entry of mutual funds, portfolio managers and foreign portfolio investors. “That’s the real part we are looking at,” he told BloombergQuint over the phone.
The Securities and Exchange Board of India on Wednesday allowed hedge funds to invest in commodity derivatives to boost liquidity. Various committees, including those constituted by the government, had suggested institutional participation to improve the quality of price discovery, allowing for better price risk management.
SEBI’s approval comes with certain conditions, including that Category-III alternative investment or hedge funds should not invest more than 10 percent of their investible corpus in one underlying commodity.
The only thing left from the regulatory perspective is a clarification over commodities transaction tax on options contracts by the Central Board of Direct Taxes, said Paranjape. The contracts are not settled in cash at expiry and essentially lead to creation of another security, he said. So, a CTT should not be levied when options are exercised, he said.
SEBI permitted trading in commodity options on June 13. The contract is essentially an option on a commodity future. Which means, if the investor is in the money at the time of expiry, it will devolve into a futures contract.
MCX qualifies to offer derivatives trading in nine commodities. The top five commodities by turnover eligible for the launch include gold, silver, crude, zinc and natural gas. MCX will apply for SEBI approval by the end this week.
“We hope to start trading by end of July or early August,” said Paranjape.