Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Portfolio Managers, Mutual Funds Await Final Guidelines To Invest In Commodity Derivatives

Portfolio managers and mutual funds are awaiting final operational guidelines from the market regulator before they start trading in the commodity derivatives segment.

The Securities and Exchange Board of India in its board meet last month allowed portfolio managers and mutual funds to participate in the exchange traded commodity derivatives market.

A sub-panel under the Commodity Derivatives Advisory Committee had advised SEBI to adopt a “calibrated approach” to include institutional investors into exchange traded commodity derivatives, according to the market regulator’s board agenda papers.

The group recommended that in the first phase these institutions should be allowed,

  • Category-III alternate investment funds
  • Portfolio management services
  • Mutual funds
  • Direct participation of foreign participants having exposure to commodities

In the second phase it suggested allowing,

  • Banks
  • Insurance/reinsurance companies
  • Foreign portfolio investors
  • Pension funds

To be sure, category-III AIFs—those trading with a view to make short-term returns and include hedge funds—were allowed much earlier but didn’t see much participation due to lack of clarity in custodian regulations.

SEBI’s board allowed mutual funds to participate in exchange traded commodity derivatives, barring ‘sensitive commodities’. Mutual funds investing in commodities derivatives may hold underlying goods in case of physical settlement of contracts. They will also have to appoint a dedicated fund manager and custodian prior to trading in this segment.

The portfolio managers will have to appoint a custodian to manage the underlying goods in case they participate in exchange traded commodity derivatives segment. As of now, portfolio managers having assets under Rs 500 crore were not required to appoint a custodian. The market regulator also allowed eligible foreign entities, subject to minimum net worth requirement, to participate in exchange traded commodity derivatives.

The move will open up the retail money managed by mutual funds and high net worth money managed by portfolio managers to actively participate in this segment as well as diversify their portfolio. But the implementation would require a couple of changes to the existing regulations governing custodians, portfolio managers and mutual funds, according to the agenda papers.

The regulator’s board in its December meet had approved the proposal to amend the SEBI (Custodian of Securities) Regulations, 1996, to make custodians responsible, in all respects, to its institutional clients for safekeeping of goods underlying the commodity derivatives contract. This was notified on Jan. 1, 2019.

The regulations governing mutual funds and portfolio managers will be amended and the operational guidelines will be released by the regulator, according to the board agenda papers.