MFs, PMS may take part in commodities derivatives market

Mutual funds and portfolio management services (PMS) are likely to be allowed to participate in the domestic commodities derivatives market. The Securities and Exchange Board of India (Sebi) could allow existing custodians in the securities market to offer custodial services in the commodity derivatives market to enable smoother institutional investors participation in the segment.

The proposal is likely to be discussed at the Sebi board meeting on Wednesday.

The capital market regulator will also discuss the proposal on allowing mutual funds to segregate distressed debt securities in their portfolios. The new rules, known as side-pocketing, will give fund houses the flexibility to carve out the defaulted paper from the rest of the portfolio to ensure that the scheme’s net asset value (NAV) remains insulated.


Sebi’s mutual fund advisory committee had recently given its nod for the proposal. The regulator is likely to accept one of the models suggested by a working group that makes existing custodians in the securities markets, the custodians for potential institutional participants.

Most commodities are compulsorily deliverable, which is why custodial services are required for institutional investors.

This was one of the sticking points for facilitating access by mutual funds and portfolio schemes in the 15-year-old commodity derivatives market. Since Sebi-registered custodians might not have the experience of handling commodities, the settlement process will be done by repository participants (RPs) on commodity bourses like MCX and NCDEX, said sources.

Repository participants are registered by warehouses regulator Warehousing Development and Regulatory Authority (WDRA) as warehouse services providers currently handle the goods and are responsible for quality and quantity parameters. They bear the onus of ensuring good delivery on the commodity bourses currently, and in all likelihood would continue do so even as existing custodians are allowed safe-keeping of commodities for institutional participants like mutual funds, said Vijay Kumar, MD of agri bourse NCDEX.

Market participants said allowing mutual funds and facilitation of PMS who can offer structured products will help deepen the commodity derivatives market.

“Institutional participants add long-term liquidity to the markets,” said Mrugank Paranjape, MD of the country’s largest metals and energy bourse MCX. “This improves the open interest as well as depth in the far end of the contract.”

Currently, commodity markets are dominated by retail level and proprietary traders and a few corporate hedgers and speculators. Category III alternate investment funds are allowed but are not actively trading. Recently, Sebi allowed foreigners with exposure to underlying Indian commodity markets, but with no presence here, to hedge on the bourses.

The entry of mutual funds and PMS will attract more hedgers to the market and will lead in its overall development. The average daily turnover of the CDS market is around Rs 30,000 crore, with MCX accounting for around 90%, followed by NCDEX and to a much smaller extent ICEX.

The working group had suggested another model of allowing existing Warehouse Service Providers (WSPs) to be custodians, but this is unlikely to be accepted by Sebi as these WSPs are regulated by WDRA. The group which submitted its draft report last month comprised four custodians, the three commodity exchanges, WSPs an AMC and an AIF.