SEBI headquarters in Mumbai (Photographer: Santosh Verma/Bloomberg)

Retail Exposure In Commodities May Face SEBI Curbs 

India’s market regulator may make it difficult for smaller investors to bet on mini contracts in commodities because of higher risks. This is in line with its policy to dissuade retail investors from equity derivatives as well.

Mini contracts have smaller lot sizes, helping retail investors participate but fragments liquidity.

In November 2012, the Securities and Exchange Board of India had asked the National Stock Exchange India Ltd. and BSE Ltd. to discontinue mini contracts of equity index derivatives. It reiterated the stand more recently in its March 28 board meet, saying “introduction of mini contracts should not be encouraged”.

Such contracts are now only available in commodities. For two reasons - there is a commercial need for trade in smaller commodity lots. Also, till 2015 commodity exchanges were regulated by the Forward Market Commission, which was then merged with SEBI. And it’s taken SEBI time to comprehend the regulatory issues in the commodities market.

Now since the regulator has allowed unified commodity and equity exchanges from Oct. 1, there is a chance of SEBI placing higher barriers for retail investors trading in commodity mini contracts.

A senior stock exchange official, who spoke to BloombergQuint requesting anonymity, agreed. Product suitability rules should be consistent for investors across assets classes especially when universal exchanges are allowed, he said.

Equity Derivatives Barriers May Apply To Commodity Markets

Starting as far back as 2000 the regulator has moved to discourage smaller investors from riskier equity derivatives by increasing the contract size, from Rs 2 lakh then to minimum Rs 5 lakh now.

Still, individual investors contributed nearly 25.6 percent of the equity derivatives turnover in 2016-17. So, SEBI decided to link eligibility to trade in derivatives with income-tax returns and any exposure beyond those limits is subject to due diligence by intermediaries.

It’s possible the regulator may similarly align the know-your-customer requirement and income tax-return-based exposure for retail investors in commodity derivatives as well, said a senior official at a commodity exchange requesting anonymity. The regulator is unlikely to tinker with the product specifications though since these are structured based on physical commodity market requirements, he said.

Impact On Commodity Exchanges

Mini contracts, with a minimum investment of Rs 2-4 lakh, are available in eight commodities on the Multi Commodity Exchange Ltd. India’s largest commodity bourse derived nearly 7 percent of the average daily turnover from such contracts in 2017, and 11 percent of the annual turnover, according to data compiled by BloombergQuint.

The exchange last introduced a mini contract on crude oil in January 2015. There has been no new proposal since the September 2015 merger of the erstwhile Forward Market Commission with SEBI—a fallout of the payments scandal at the National Spot Exchange Ltd.

Mini Contracts on MCX:

  • Crude Oil
  • Nickel
  • Gold
  • Silver
  • Copper
  • Aluminium
  • Zinc
  • Lead

MCX didn’t respond to BloombergQuint’s emailed queries on the possibility of retail investors facing curbs in mini contracts. The exchange gets nearly a quarter of its commodity derivatives turnover from retail investors, according to the person quoted above.