Sebi may open up commodity futures to FPIs | Economic Times

Mumbai: At a time China is allowing more offshore investment into commodities, India is mulling over a plan to let foreign portfolio investors (FPIs) trade commodity futures listed on local exchanges.The Securities & Exchange Board of India (Sebi) recently held a meeting with leading international commodity trading firms, FPIs which are large commodity investors in other markets, banks, and one of the bourses to understand their views on the subject, according to two persons who attended the meeting.Unlike other financial products like stock, bond, gilt, and currency, foreign firms are restricted from taking positions in exchange traded commodity derivatives.‘Foreign eligible entities’ are allowed to ‘hedge’ their positions in a domestic commodity exchange after submitting all documents to demonstrate their export or import of commodities with an Indian party. But these are one-way trades limited to the extent of their exposure to the physical markets — with regulations disallowing them to freely buy and sell commodity futures.Allowing FPIs or other foreign investors to have position limits in commodity futures (beyond pure hedging) will only require changes in Sebi’s regulations — and not any amendment of laws. Commodity futures (like equities and corporate bonds) are already recognised as ‘security’ under the Securities (Contracts) Regulation Act.“We got the impression that the regulator is open to the idea. While one of the commodity exchanges took an active interest in the meeting, the invitations came from Sebi. So, they may be weighing the pros and cons of allowing FPIs in some non-agricultural and non-sensitive commodities like gold, silver etc... China too is making it easier for foreign funds to trade in commodities,” a source told ET.In November 2020, China came out with new rules to give foreign institutional investors easier access to the commodity futures market. Compared to earlier regulations which allowed foreign funds to invest in stock index futures, under the new framework the range of products was widened to include bond futures listed on the China Financial Futures Exchange and commodity futures and options traded on exchanges in Dalian, Shanghai and Zhengzhou. From June18, 2021, RBD palm olein options became the first option product for foreign investors to trade in China. 83704345The daily traded volume on Indian commodity exchanges is Rs 30,000-40,000 crore.“In global markets, the position limits are huge. So, to draw FPIs, the government and the regulator have to increase the limits. They should do away with documentation requirements for trade. Besides, there should be greater clarity on tax. Since a foreign fund has no presence in India, a foreign fund would go for cashsettled deals (that do not result in actual delivery of commodities). An FPI is not looking at hedging but may want to diversify its portfolio with commodity futures,” said a senior banker.Even in other securities, FPIs do not aggressively hedge their exposure. While they do hedge against the risk on foreign exchange losses on a large part of bond holdings where the gains are limited, not more than10-20% of their equity exposure is hedged.Besides aiming greater transparency and price discovery through higher volumes and liquidity, the regulator may have a plan to see India emerge in the long run as a price-settler in some commodities.But, deregulation of commodity futures has run into hurdles in the past due to fears, though unfounded, of prices of futures influencing prices in the physical market. Under the circumstances, FPI could be allowed in a way that inflows do not push up the headline and consumer inflation. Many countries, including China, have had to carry out a delicate balancing and take a calibrated approach while opening up commodity futures to foreign funds.According to a May 31, 2021, report in ‘Materials Risk’, a commodity news portal, “Chinese commodity futures markets are very poor at fundamental price discovery — momentum base trading can take prices significantly further away from fundamentals than other global commodity markets. The government is prone to frequent crackdowns should trading activity threaten economic, financial or social stability.”