Banks begin preparing for trade in commodity derivatives TESTING WATERS

After last week’s decision by the Reserve Bank of India (RBI) to allow banks’ participation in commodity derivatives (except on their own account), both private and public sector lenders have started feasibility study of the business. And, on how to take membership in commodity exchanges.

Informed sources said banks had held several rounds of talks with officials of leading comexes, to understand the nature of commodities and the factors that drive their prices in the physical and futures markets. They’re keen to start trading in select non-agricultural commodities and a couple of agricultural ones, before commencing fullfledged trading in this new segment for them.

Both comexes and their erstwhile regulator, the Forward Markets Commission (FMC), had been advocating that banks and other financial institutions be allowed for trading in commodity futures, since the latter’s relaunch in 2002.

The government wanted to first institute a strong regulator before allowing banks’ participation. FMC was absorbed into the Securities and Exchange Board of India (Sebi) in September 2015. The RBI, as mentioned, amended its guidelines last week for allowing banks to offer commodity derivative products through subsidiaries currently dealing in financial products, i.e securities.

Nearly three months earlier, Sebi had allowed Category-III hedge funds to trade in commodity futures, to deepen the market.

“We’re doing a feasibility study, | Both private & public lenders started feasibility study of the business. And, on how to take membership in commodity exchanges | Banks had held several rounds of talks with officials of leading comexes to understand the nature of commodities and the factors that drive their prices including what approvals we need, both internally and from the regulators. We do not have a date for commodity trading commencement,” said a spokesperson of HDFC Securities, subsidiary of HDFC Bank.

Sources said other banks, private and government-owned, have approached exchanges to get details of commodity derivative products and of operations. According to a senior | Lenders keen to start trading in select non-agricultural commodities and a couple of agricultural ones before commencement of full-fledged trading | Other banks, private & governmentowned, approached exchanges to get details of commodity derivative products and of operations exchange official who was part of such a discussion, banks are enthusiastic about commodity derivatives, though cautious about frequent changes in relevant government policies.

“Discussions are in an advanced stage. We hope banks will get exchange membership soon,” said the official.

Sebi and the comexes are also working together to bring more participation in commodity derivatives, through introduction of more products and participants. At a seminar last week, Sebi executive director S K Mohanty said, “New sets of products and participants are required for strengthening this market. We have allowed options in commodities. To deepen the (commodity futures) market further, we are in an advanced stage of discussion to allow mutual funds’ participation in commodities."

Sebi has allowed options trading in gold on the Multi Commodity Exchange and guar on the National Commodity and Derivatives Exchange.

“New sets of trading members are needed, along with new groups of products. We are confident that such initiatives would add to commodity futures' volume exponentially,” said Mrugank Paranjape, managing director of MCX, last week while launching indices on the platform.