Funds likely to launch commodity derivatives schemes by early FY20

Mumbai: The Securities and Exchange Board of India (Sebi) will amend the Mutual Fund Amendment Regulations of 2018 and the Portfolio Management Amendment Regulations 2016 enabling mutual funds and portfolio managers to participate in the agri and non-agri commodity derivatives segment (CDS) within a month. The regulator will then notify the same after intimating the finance ministry, a person aware of the development told ET. Sebi approved MF and PMSes’ participation at its board meet on March 1.

This means the ground for participation by the funds would be laid around the beginning of the coming fiscal year (FY20). “The changes to the relevant regulations will have to be made and the same will have to be notified. This should happen in a month’s time,” said the person. He added that discussions were also on for the introduction of index trading in commodities.

Sebi officials were not immediately available for comment.


ET also learnt that Sebi would soon issue a circular spelling out the commodities that would be made available for trading by the funds, position limits, margins applicable, etc. Certain sensitive agri commodities, which are subject to frequent government interventions and statewise stock holding limits, will be out of bounds for funds. But broad agri commodities such as wheat, sugar, etc, will be open for trade, said the person cited earlier.

All non-agri commodities will be available for them to trade in.

Market stakeholders expect institutional participation to deepen the 15-year old commodity derivatives segment. “Institutional participation will play an important role in adding liquidity and depth to the commodity derivatives market, leading to enhanced efficiency in price discovery and risk management,” said Mrugank Paranjape, MD, MCX, the country’s largest commodity derivatives exchange.

NSE, the country’s largest equity bourse, which launched a commodity derivatives segment in October last year, expects some of the funds to enter the fray soon.

“The matter of allowing funds has been under discussion for a while now and our sense is some of them could jump in fairly soon,” said Ravi Varanasi, chief business development officer at NSE. “Also, they will be able to channel part of their funds, that wouldn’t have otherwise been accessible, into this market. Their entry would thus increase both liquidity and depth and lend balance to the market.”


Current participants in the CDS are physical market traders, who also use the segment for informed speculation, a few corporate hedgers, jobbers, day traders, arbitrageurs, few farmer producer organisations and external foreign entities. Participation by alternate investment funds category III has also begun with Reliance AIF, a wholly-owned subsidiary of Reliance Nippon Life Asset Management, recently launching its first commodity fund.

As institutions were not permitted to trade so far, liquidity in CDS pales in comparison to that in equity and currency derivatives. For e.g., aggregate CDS turnover of MCX, NCDEX, ICEX, NSE and BSE was Rs 6.7 lakh crore in January, according to Sebi’s monthly bulletin. Compared to this, equity derivatives turnover on NSE alone was at a whopping Rs 220.8 lakh crore in January. Currency derivatives turnover at NSE, BSE and MSEI was Rs 7.49 lakh crore.

Nilesh Shah, MD, Kotak AMC, said funds would adopt a “calibrated approach to understanding the commodity market and probably launch in sequence an arb (arbitrage) fund, precious metals fund and then a diversified commodities fund.”

Ashish Chauhan, MD of BSE, said Sebi’s decision will “provide the much needed depth to the Indian organized commodities derivatives market and make it more liquid.”