In order to deepen the commodity derivative market, SEBI has come out with a consultation paper seeking comments from public on the proposal of permitting MFs and PMs to participate in commodity derivatives and to determine a regulatory framework.
Currently, mutual funds can launch only gold ETFs while portfolio managers can invest client’s money in money market instruments or derivatives as specified in the contract.
Here are the key points where SEBI seeks comments:
- Whether MFs can be permitted to participate in commodity derivatives?
- What can be the appropriate route through which mutual funds may participate in commodity derivatives?
- Whether the following routes can be considered:
Through separate dedicated schemes (a new scheme) based on commodity derivatives:
- ETFs based on commodity derivatives: Can dedicated ETFs be considered on certain commodities or a basket of commodities as permitted by SEBI from time to time?
- Open-Ended Schemes (Passive/Active) based on commodity derivatives: Can open ended schemes be considered which intend to invest majority of the AUM in exchange traded commodity derivatives as permitted by SEBI from time to time? Such scheme could be launched either as an index fund or could be actively managed.
- Commodity Arbitrage Funds: Can commodity arbitrage funds be considered, where the scheme intends to benefit from the arbitrage opportunity available between cash and derivatives market in commodities as permitted by SEBI from time to time?
- Any other Category of Schemes.
Through investing part of the AUM (of the existing/ new schemes) in Commodity Derivatives
- Hybrid Schemes / Multi-Asset Scheme: Can MFs be permitted to invest certain percentage of the AUM of existing hybrid/ multi-asset schemes in commodity derivatives?
- Gold ETFs: Can MFs in case of existing gold ETFs, be permitted to invest in exchange traded commodity derivatives with gold as underlying as part of gold related instruments to a certain extent?
- Gold Fund of Fund (FoF) Schemes: Can MFs, in case of gold fund of fund schemes, be permitted to invest certain percentage of the AUM in commodity derivatives?
- Whether there is a need for investment restrictions to be placed on MF schemes which invest only in commodity futures?
The consultation paper also proposes the relaxation of the norms for portfolio management in commodity derivatives.
The paper proposes that leveraging of portfolio and the pooling of investments may be permitted in commodity derivatives. The pooling of investments maybe allowed as investing in high value commodity derivative contracts from individual clients’ account can lead to concentration risk.
The points for public consideration for PMs investment in commodity derivatives are:
- Whether PMs can be permitted to participate in commodity derivatives market?
- Whether PMs can be permitted to leverage the portfolio of their clients for investing in commodity derivatives? If yes, then:
- What can be the optimum extent of leveraging?
- What mechanisms can be put in place to safeguard the interests of clients?
- What disclosures can be included in the disclosure document to adequately disclose the enhanced risk of portfolio leveraging?
- Whether PMs can be permitted to pool the investments in commodity derivatives? If yes, then:
- Who should maintain such pool?
- What mechanisms can be put in place to safeguard the interests of clients?
- What disclosures can be included in the disclosure document to adequately disclose the enhanced risk caused by pooling of commodity derivatives?
- In case, portfolio leveraging and pooling of commodity derivatives is permitted, should the participation in Commodity Derivatives be restricted only to the clients beyond a certain threshold?
- Any other concern / suggestion regarding participation of PMs in exchange traded commodity derivatives.
You can send your comments regarding mutual funds and portfolio managers to mfcomments@sebi.gov.in and pms@sebi.gov.in respectively by December 31.
