Sebi to open commodities route for AIFs
Mumbai: The board of the Securities and Exchange Board of India (Sebi) has initiated the process of opening up the country’s commodity derivatives market to new participants.The regulator will initially allow Alternate Investment Funds (AIFs) to invest in commodity futures, two people aware of the matter said.
However, according to a finance ministry official, the Sebi board, which met on Saturday, did not take up amendments to Sebi rules to permit launch of commodity options. All three persons declined to be identified.“Sebi is working on allowing AIFs, particularly the category III (such as hedge funds) segment in commodity derivatives market. Sebi has already written to the Reserve Bank of India and ministry of agriculture for their comments,” said the first person cited above. “Institutional participants are important from the perspective of providing liquidity in the market,” he added.
The need to increase liquidity in the commodity market by increasing institutional participation was discussed at Sebi’s Commodity Derivatives Advisory Committee (CDAC) meeting in May 2016.
The Sebi board discussed reforms in the commodity derivatives market such as allowing newer participants in a phased manner.According to the second person cited above, even as Sebi is awaiting approval from the central bank and the agriculture ministry, the markets regulator is no longer taking an undertaking from AIFs, when they come for registration, that they wouldn’t invest in commodities. “Typically, when we initiate the process for registration and renewal of AIFs—category III, we are required to give an undertaking that the fund wouldn’t invest in commodity derivatives. Recently, when we have sent such applications, we were not required to give this undertaking,” said the second person, who represents AIFs.
“Allowing investments by Category III AIFs in commodity derivatives has been on the wish list of hedge fund managers for past several years,” said Tejesh Chitlangi, partner at law firm IC Legal.As per the second person, an AIF of Rs 1000 crore has sought Sebi approval to invest in commodities, among other assets such as equity and real estate.
Currently, institutional investors such as financial institutes, foreign portfolio investors (FPIs), mutual funds are not allowed to invest in commodity markets. However, there are no legal hurdles preventing investors from participating in the commodities market as the amended Sebi Act includes commodity derivatives among permissible securities.
“Permitting this specific investment avenue can help fund managers to maximise returns for investors and may infuse much needed liquidity in the commodity derivatives segment. Category III AIFs also makes sense as these essentially are high risk, high reward investment vehicles,” said Chitlangi. Domestic institutions such as mutual funds may be allowed next, said the first person. Other categories of investors such as insurance companies, pension funds and FPIs would need clearances from their respective regulators.
Saturday’s board meeting, however, did not work to remove the legal hurdle preventing the launch of commodity derivative options.
“The board proposal was deferred due to the department of economic affairs envisaging that there is a need to amend the Sebi Act itself and not just the Stock Exchange and Clearing Corporation (SECC) rules,” the ministry official quoted earlier said.On 20 January, the market regulator had floated a discussion paper inviting comments on how to settle and price commodity options product, lack of which was making it difficult for exchanges to launch this product. For this, the regulator had proposed amendments to SECC regulations to allow options that have commodity futures as underlying.
In spite of commodities coming under Sebi’s regulatory purview since the merger of the erstwhile commodities regulator, the Forward Markets Commission (FMC) with it in September 2015, Sebi had been reluctant to allow new categories of investors, due to concerns over risk management and potential surveillance lapses in commodity derivatives trading. Since then, the regulator has focused on strengthening the risk management framework in the commodities market.
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However, according to a finance ministry official, the Sebi board, which met on Saturday, did not take up amendments to Sebi rules to permit launch of commodity options. All three persons declined to be identified.“Sebi is working on allowing AIFs, particularly the category III (such as hedge funds) segment in commodity derivatives market. Sebi has already written to the Reserve Bank of India and ministry of agriculture for their comments,” said the first person cited above. “Institutional participants are important from the perspective of providing liquidity in the market,” he added.
The need to increase liquidity in the commodity market by increasing institutional participation was discussed at Sebi’s Commodity Derivatives Advisory Committee (CDAC) meeting in May 2016.
The Sebi board discussed reforms in the commodity derivatives market such as allowing newer participants in a phased manner.According to the second person cited above, even as Sebi is awaiting approval from the central bank and the agriculture ministry, the markets regulator is no longer taking an undertaking from AIFs, when they come for registration, that they wouldn’t invest in commodities. “Typically, when we initiate the process for registration and renewal of AIFs—category III, we are required to give an undertaking that the fund wouldn’t invest in commodity derivatives. Recently, when we have sent such applications, we were not required to give this undertaking,” said the second person, who represents AIFs.
“Allowing investments by Category III AIFs in commodity derivatives has been on the wish list of hedge fund managers for past several years,” said Tejesh Chitlangi, partner at law firm IC Legal.As per the second person, an AIF of Rs 1000 crore has sought Sebi approval to invest in commodities, among other assets such as equity and real estate.
Currently, institutional investors such as financial institutes, foreign portfolio investors (FPIs), mutual funds are not allowed to invest in commodity markets. However, there are no legal hurdles preventing investors from participating in the commodities market as the amended Sebi Act includes commodity derivatives among permissible securities.
“Permitting this specific investment avenue can help fund managers to maximise returns for investors and may infuse much needed liquidity in the commodity derivatives segment. Category III AIFs also makes sense as these essentially are high risk, high reward investment vehicles,” said Chitlangi. Domestic institutions such as mutual funds may be allowed next, said the first person. Other categories of investors such as insurance companies, pension funds and FPIs would need clearances from their respective regulators.
Saturday’s board meeting, however, did not work to remove the legal hurdle preventing the launch of commodity derivative options.
“The board proposal was deferred due to the department of economic affairs envisaging that there is a need to amend the Sebi Act itself and not just the Stock Exchange and Clearing Corporation (SECC) rules,” the ministry official quoted earlier said.On 20 January, the market regulator had floated a discussion paper inviting comments on how to settle and price commodity options product, lack of which was making it difficult for exchanges to launch this product. For this, the regulator had proposed amendments to SECC regulations to allow options that have commodity futures as underlying.
In spite of commodities coming under Sebi’s regulatory purview since the merger of the erstwhile commodities regulator, the Forward Markets Commission (FMC) with it in September 2015, Sebi had been reluctant to allow new categories of investors, due to concerns over risk management and potential surveillance lapses in commodity derivatives trading. Since then, the regulator has focused on strengthening the risk management framework in the commodities market.
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