MFs may enter commodity derivatives DECODING THE PROPOSAL
The Securities and Exchange Board of India (Sebi) proposes to permit mutual funds (MFs) and portfolio managers (PMs) to participate in exchange-traded commodity derivatives.
On Thursday, it issued a consultation paper on this, seeking reactions by the end of this month — on allowing them, how and a possible regulatory framework.
This is the market regulator's second move to allow institutional participants in commodity Markets Commission, decided to derivatives. Earlier, it had decided ban them. The new consultation to allow category-III alternative paper has explained several commodities investment funds or hedge and their indices and funds. Allowing MFs and PMs their correlation with the respective would be a second move in the spot market. However, the direction of broadbasing the commodity table containing the information derivative segment, to doesn’t mention any agricultural improve liquidity and permit commodities, giving the impression institutional players. that this class of investors will
PMs were active in commodity not be permitted here. derivatives till the erstwhile segment However, regulator, sector the officials Forward say institutional players should also be allowed in agri commodities. Samir Shah, managing director at the National Commodity and Derivatives Exchange, said: “There are enough safeguards through position limits, etc, to prevent too much money flowing into agri. At the same time, the agri markets need the sophistication of institutional participation to bring more research-based participation.” According to brokers, several companies have also started hedging their commodity risk in liquid agri commodities. Hence, there is a need to allow the new category of institutional investors in commodity derivatives."
As of now, only gold is a permissible commodity for institutional investors and are allowed through exchange-traded funds (ETFs). Around seven years earlier, the National Stock Exchange had permitted a silver ETF but this was later withdrawn. An ETF in crude oil was also proposed, but it was never permitted.
The exchanges have been discussing the issue with MFs and PMs. Some MFs have been preparing for the day when Sebi allows them into commodities. A Multi Commodity Exchange spokesperson said, “Sebi’s proposal shows its commitment to develop the commodity derivatives market and emphasises the importance of institutional participation. With MFs witnessing huge inflow, indicating increased participation from a larger base of investors, the commodities segment being available to fund and portfolio managers as an additional or alternative asset class for diversification assumes significance.”
Adding: “We have been in continuous engagement with the MF and PMS industry, alongside Sebi, and expect the industry will also take all initiatives to be ready for participation, as soon as guidelines are issued.”
Sebi has said its Commodity Derivatives Advisory Committee (CDAC) has recommended the market here be opened to institutional participation, domestic and international, in a phased manner. Recognising commodity derivatives as a new asset class, it noted, “Adding commodities in the portfolio would typically increase some risk but the overall risk adjusted return of the portfolio might improve. Addition of commodities to a hybrid portfolio could lower the overall volatility, as returns from commodities have not been highly correlated with returns from equities and fixed income asset classes.”
Sebi has proposed three ways of allowing MFs in the commodity segment. One, ETFs based on commodity derivatives. Two, open-end schemes (passive/ based on commodity derivatives. Three, commodity arbitrage funds. It has sought views on what else could be done.