SEBI panel for more players in commodities

Blind spot:  Lack of expertise is holding back a sizeable number of investors from the derivatives markets.

Blind spot: Lack of expertise is holding back a sizeable number of investors from the derivatives markets.

A panel constituted by the Securities and Exchange Board of India (SEBI) has recommended opening the commodity derivatives segment to all categories of institutional investors in a phased manner, to enhance the depth and liquidity of the commodity market.

‘Calibrated approach’

The Commodity Derivatives Advisory Committee (CDAC), which has been formed to review the commodity segment and suggest measures to improve the depth and efficiency of the market, has suggested that the capital markets regulator should adopt a ‘calibrated approach’ before opening up the segment to overseas investors. The panel is of the view that in the next phase, institutional investors like foreign portfolio investors, banks, insurance companies and pension funds should be allowed in the commodity derivatives segment.

“Commodity derivatives would be a new asset class for the investors and can be used as hedge against inflation. Investment in commodity derivatives in a portfolio may also benefit the investors in terms of better portfolio diversification,” according to a SEBI paper presented to the board of the regulator ahead of its meet on March 1.

Incidentally, last month saw the regulator giving the final go-ahead to mutual funds and portfolio managers to participate in the commodity segment. Last year, in October, the so-called eligible foreign entities (EFE) that have an exposure in the Indian physical commodity market were allowed to trade in the commodity derivatives segment.

According to the panel, a substantial number of investors, including retail investors, are not able to directly access the commodity derivatives markets due to lack of knowledge and expertise.

Market participants are of the view that while institutional players do help in broadening the segment, the market also needs to offer more liquidity especially in the longer dated contracts to attract bigger players.

“Globally, commodity derivatives are a big pull for corporates and institutions that use the platform for hedging their price risk,” said Naveen Mathur, director — commodities & currencies, Anand Rathi Shares & Stock Brokers.

“Allowing more institutional participation in the Indian commodity segment is a welcome move as it offers the benefit of broadening the market though their participation depends on the depth and liquidity that the segment offers. Institutional entities are investors and not traders and hence would be attracted if there is liquidity in the longer dated contracts,” Mr. Mathur added.

Our code of editorial values

This article is closed for comments.
Please Email the Editor

Printable version | May 17, 2022 11:56:11 pm |