{"id":17373,"date":"2019-05-23T19:04:16","date_gmt":"2019-05-23T13:34:16","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=17373"},"modified":"2019-06-27T17:07:25","modified_gmt":"2019-06-27T11:37:25","slug":"sebi-allows-mutual-fund-to-trade-commodity-derivatives","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/sebi-allows-mutual-fund-to-trade-commodity-derivatives\/","title":{"rendered":"SEBI allows Mutual Fund Participation to trade Commodity Derivatives"},"content":{"rendered":"<p>On 21<sup>st<\/sup>\nMay, 2019, the Securities and Exchange Board of India (SEBI) permit mutual funds\nto participate in exchange-traded commodity derivatives (ETCD) on behalf of\ntheir clients to promote institutional participation in the segment. Hence,\nSEBI has allowed Category III Alternative Investment Funds to participate in\nexchange-traded commodity derivatives.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What are Exchange Traded Commodity\nDerivatives?<\/strong><\/h2>\n\n\n\n<p>An\nexchange-traded commodity (ETC) gives traders and investors exposure to\ncommodities (called the&nbsp;underlying)&nbsp;in the form of shares. Traded\nlike a stock, i.e., bought and sold on a stock exchange, ETCs track the price\nmovement of commodities like oil, gold, and silver and then fluctuate in value\nbased on those commodities. ETCs&nbsp;may&nbsp;track individual commodities\nand\/or a commodity basket. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Mutual Funds participation in Exchange\nTraded Commodities Derivatives (ETCDs)<\/strong><\/h2>\n\n\n\n<p>In the recent notification, portfolio managers will be able to participate in Exchange Traded Commodity Derivatives agreeing with the client. For the existing clients, they may execute addendums to the agreement which will allow them to participate in ETCDs on SEBI&rsquo;s behalf.<\/p>\n\n\n\n<p><\/p><div class=\"shadow1\"><strong>A portfolio manager is accountable for investing a mutual, exchange-traded, or closed-end fund&rsquo;s assets, implementing its&nbsp;investment plan,&nbsp;and managing day-to-day portfolio trading. &nbsp;A portfolio manager is the most important factors to consider when looking at fund investing. <\/strong><\/div>\n\n\n\n<p>Moreover,\nit would be compulsory for portfolio managers to appoint SEBI registered\ncustodian before dealing in ETCDs<\/p>\n\n\n\n<ul><li>As per the latest guidelines, SEBI has allowed mutual funds to participate in all the exchange-traded Commodities Derivatives except the &ldquo;Sensitive Commodities.&rdquo; <\/li><li>Until now, Mutual Funds were not permitted to invest in the commodities other than gold. <\/li><\/ul>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" loading=\"lazy\" width=\"628\" height=\"455\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/05\/image-55.png\" alt=\"Commodity Derivatives\" class=\"wp-image-17374\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/05\/image-55.png 628w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/05\/image-55-300x217.png 300w\" sizes=\"(max-width: 628px) 100vw, 628px\"\/><\/figure><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Effect of Mutual Funds participation in Exchange\nTraded Commodities Derivatives (ETCDs)<\/strong><\/h2>\n\n\n\n<ul><li>Commodity derivatives are an unbalanced space on\na standalone <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a>. Hence, mutual funds will make a decision to initiate\ncommodity-dedicated schemes.<\/li><li>Commodity derivatives can be a part of hybrid\nschemes that will give diversification flavor across equities commodities and\ndebt.<\/li><\/ul>\n\n\n\n<p>However,\nphysical delivery is not allowed, which could be a hindrance for MFs going for\ncommodity funds.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Guidelines\nintroduced by SEBI<\/strong><\/h2>\n\n\n\n<ul><li>SEBI has now allowed&nbsp;mutual funds to contribute\nin all exchange-traded commodities derivatives (ETCDs) except the &lsquo;sensitive\ncommodities&rsquo;. <\/li><\/ul>\n\n\n\n<p><strong><em>&ldquo;Please\nnote that Essential commodities in the Agri segment are considered as sensitive.&rdquo;<\/em><\/strong><\/p>\n\n\n\n<ul><li>Hybrid and gold exchange-traded funds are allowed to participate in ETCDs. However, they have been banned from taking physical delivery.<\/li><li>Also, it was informed that no <a href=\"https:\/\/enterslice.com\/learning\/procedure-mutual-funds-registration-india\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"mutual fund scheme (opens in a new tab)\">mutual fund scheme<\/a> shall have net short positions in ETCD on any particular good because of its locations in physical products as well as ETCDs at any time.<\/li><li>SEBI has bound fund houses to appoint a dedicated fund manager with necessary skills and experience in the commodities <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a> (including commodity derivatives market) before trading in ETCDs<\/li><li>Moreover, SEBI directed Mutual Funds to appoint a custodian registered with it for custody of the underlying goods which arises due to physical settlement of the contracts.<\/li><\/ul>\n\n\n\n<p><\/p><div class=\"shadow1\"><strong>SEBI informed that before participating in ETCDs; the unit-holders of the existing scheme will be provided at least 30 days to exercise the option to exit at current net asset value (NAV) without exit load charges. Mutual Funds can participate in ETCDs of a good, not exceeding 10 percent of NAV of the scheme.<\/strong><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Hedging<\/strong><\/h2>\n\n\n\n<ul><li>MFs can now hedge with commodities derivatives\nagainst metals, oil and gas and other commoditized equities.<\/li><li>Investment in exchange commodity derivatives\nwill regularly add value from an inflation hedging opinion. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The Viewpoint of Asset Manager on Commodity Derivatives<\/strong><\/h2>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" loading=\"lazy\" width=\"628\" height=\"250\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/05\/image-56.png\" alt=\"Commodity Derivatives\" class=\"wp-image-17375\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/05\/image-56.png 628w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/05\/image-56-300x119.png 300w\" sizes=\"(max-width: 628px) 100vw, 628px\"\/><\/figure><\/div>\n\n\n\n<ul><li>As per various asset managers, commodity\nderivatives can be used as a hedge against equity market oil price shocks. <\/li><li>In the case of a slowdown in metals or\nutilities, commodity derivatives can act as a&nbsp;hedge in hybrid portfolios.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Commodity\nExposure<\/strong><\/h2>\n\n\n\n<ul><li><a href=\"https:\/\/www.sebi.gov.in\/index.html\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"SEBI  (opens in a new tab)\">SEBI <\/a>has now started working toward developing the commodities market by bringing in more products and participants like FPIs, insurance, and mutual funds. <\/li><li>Earlier, SEBI was concerned about the low participation of producers and hedgers in the commodity market.<\/li><\/ul>\n\n\n\n<p>After\n2017, SEBI designed various rules to change commodity market to introduce\ntransparency, reduce risks and include new participants such as banks, mutual\nfunds, foreign portfolio investors (FPIs) and alternative investment funds, to\nimprove liquidity.<\/p>\n\n\n\n<p>This\nmove will give retail investors indirect exposure to the commodities market for\nthe first time.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<p>This is a welcome step for the Indian Commodity Market. SEBI has address many concerns that asset managers will have. But, categorizing mutual funds as &lsquo;Clients&rsquo; and subjecting them to participation limits are significant concerns.&nbsp;If mutual funds can find the right fund manager with an investment, then it would encourage investors to participate in this <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Asset Class&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;An asset class is a category of investments that exhibit similar characteristics, behaviors, and regulations in the financial market. They are grouped into primary sectors such as equities,(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/asset-class\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>asset class<\/a>.<\/p>\n\n\n\n<p>Also Read: <a href=\"https:\/\/enterslice.com\/learning\/sebi-and-irdai-regulatory-sandbox-regulations\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"SEBI and IRDAI introduces Regulatory Innovative Sandbox Regulations (opens in a new tab)\">SEBI and IRDAI introduces Regulatory Innovative Sandbox Regulations<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>On 21st May, 2019, the Securities and Exchange Board of India (SEBI) permit mutual funds to participate in exchange-traded commodity derivatives (ETCD) on behalf of their clients to promote institutional participation in the segment. Hence, SEBI has allowed Category III Alternative Investment Funds to participate in exchange-traded commodity derivatives. What are Exchange Traded Commodity Derivatives? [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":17380,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5,1599],"tags":[2470,2181],"acf":{"service_id":"227"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>SEBI allows Mutual Funds Participation to trade Commodity Derivatives<\/title>\n<meta name=\"description\" content=\"SEBI permit mutual funds to participate in exchange-traded commodity derivatives on behalf of their clients to promote institutional participation\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/sebi-allows-mutual-fund-to-trade-commodity-derivatives\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"SEBI allows Mutual Funds Participation to trade Commodity Derivatives\" \/>\n<meta property=\"og:description\" content=\"SEBI permit mutual funds to participate in exchange-traded commodity derivatives on behalf of their clients to promote institutional participation\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/sebi-allows-mutual-fund-to-trade-commodity-derivatives\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2019-05-23T13:34:16+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2019-06-27T11:37:25+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/05\/Commodity-Market.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"700\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Neelansh Gupta","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/04\/IMG_20190305_185223.jpg","authorDescription":"Mr. Neelansh Gupta is a Legal Counsel having extensive in-depth knowledge of various laws.  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