A trader works on the trading floor of the Multi Commodity Exchange of India in Mumbai, India. (Photographer: Amit Bhargava/Bloomberg News)

SEBI Proposes To Allow Mutual Funds And Portfolio Managers In Commodity Derivatives

Market regulator SEBI has sought stakeholder opinion on allowing mutual funds and portfolio managers to invest in the commodity derivative market.

The Commodity Derivatives Advisory Committee of the Securities and Exchange Board of India had recommended that commodity markets should be opened up to domestic and foreign institutional investors in a phased manner.

Currently, fund houses can launch only one kind of commodity mutual fund – Gold ETFs which invest in gold and gold-related instruments such as the gold deposit scheme and gold monetisation scheme. Gold ETFs are required to invest 95 percent of their assets under management in gold and gold related instruments. Total AUM of Gold ETFs at the end of Oct. 31, 2017 stood at Rs 5017 crore with 3.55 lakh folios, according to SEBI’s discussion paper.

SEBI has sought industry feedback on whether mutual funds can be permitted to invest in commodity derivatives and the routes through which they can participate. The regulator asked in its discussion paper whether commodity-based ETFs, open ended funds and arbitrage funds should be allowed. It also sought stakeholder feedback on whether existing schemes should be allowed to invest in commodity derivatives.

Existing SEBI regulations also prevent portfolio managers from investing in the commodity derivatives market though they can invest in securities which includes commodity derivatives.

On this, the regulator has proposed allowing investment in derivatives through borrowing, which is presently not permitted. The regulator is wary of allowing investing in high value commodity derivatives contracts from individual clients account as it could lead to concentration risk. It has, instead, proposed pooling of investments in exchange-traded commodity derivatives. The regulator will have to take a final decision on the extent of leveraging that would be allowed and the safeguards that need to be put in place.

The regulator has sought comments on the draft consultation paper by Dec. 31.