INSUBCONTINENT EXCLUSIVE:
With an aim to deepen the commodity derivatives market, regulator Sebi today proposed allowing trading in this segment by foreign entities
with exposure to the Indian physical commodity market.
To begin with, foreign entities may be allowed to hedge their exposures with
derivatives trading in only those commodities where India has a large production, consumption or export share globally, barring the
sensitive commodities.
Proposing a detailed set of norms for eligibility criteria, disclosure and KYC requirements, code of conduct and
safeguards against any unwanted price fluctuations, Sebi, in a consultation paper said that the final regulations would be framed after
taking into account public comments till June 18.
The proposal follows recommendation from the regulator's Commodity Derivatives Advisory
Committee (CDAC) for allowing in this market the hedge funds (category III alternative investment funds), portfolio management service (PMS)
firms, mutual funds and direct participation of foreign participants having exposure to commodities in the first phase.
In the second phase,
the CDAC has proposed to allow banks, insurers, foreign portfolio investors and pension funds in the commodity derivatives market.
Earlier
last year, Sebi had issued consultation papers for allowing mutual funds, portfolio managers and hedge funds, among others.
Sebi said it has
been advised by the CDAC to adopt a calibrated approach before opening up the commodity derivatives market to foreign participation where,
presently the domestic institutional participation is also not allowed.
According to Sebi, allowing direct participation of foreign entities
having actual exposure to commodities may make Indian commodity derivative markets more broadbased, vibrant, deep and efficient
Further, it may also add to the depth and liquidity in the far-month contracts.
"The participation by these entities may in the long run,
pave way for Indian markets in becoming price setters for some of the global commodities," the regulator noted.
Foreign entities, having
actual exposure to Indian physical commodity markets, may be termed as --Eligible Foreign Entities (EFEs).
Such EFE is not resident in
India; may be Non-Resident Indian (NRIs), provided that such NRIs are engaged in physical commodity trading businesses with India
The minimum networth requirement for such EFE should be USD 1 million and however this limit may be gradually reviewed based on experience
of EFE participation in the market.
With regard to registration, Sebi said that EFEs desirous of taking hedge positions in Indian commodity
derivatives market should approach Authorised Stock Brokers (ASBs), from amongst the brokers which are registered under Sebi.
The exchanges
should jointly frame guidelines regarding the eligibility criteria for the ASBs approved by their risk management committees.
Besides, EFE
need to be required to meet the KYC requirements.
The commodity derivatives exchanges will put in place appropriate risk management systems
in place for allowing EFE to take positions in eligible commodities as well as a mechanism to monitor the limits as well as physical
exposure of an EFE, which may include seeking periodical reports.
The position limits should be governed by the hedge policy of the
commodity derivatives exchanges and no separate client trading limits should be allowed for EFEs
Such exchanges should issue a separate hedge code for easy identification of EFEs.
However, Sebi can place restrictions based on the need to
maintain market integrity.
Hedge limits for a commodity will be determined on a case to case basis, depending on the applicant's hedging
requirement and other factors which the commodity derivatives exchange deems appropriate in the interest of the market.
Regarding
disclosure, Sebi said that commodity derivatives exchanges on daily basis need to disclose on their website the positions as well as hedge
limit allocated to EFEs, indicating the period for which approval is valid, in an anonymous manner.
