Markets regulator SEBI is likely to approve Deutsche Bank by next month to operate as a custodian in the commodities space, a move which will enable participation from institutional investors, including mutual funds and portfolio management service providers, in such segment.
To help broaden the commodity derivatives market, SEBI’s board in March this year approved a proposal to allow mutual funds and portfolio managers to trade in this segment. Moreover, the regulator made necessary amendments in the custodian regulations to provide for requisite custodial services.
The regulator in May came out with guidelines allowing mutual funds and portfolio managers to invest in commodity derivatives.
However, institutional investors have been staying away from the segment and experts believe lack of custodial services has been a key deterrent to institutional participation in the commodity derivatives markets.
Many custodians have been sceptical about managing the physical delivery of commodities as they lack domain expertise concerning agricultural commodities and warehousing.
Now, sources privy to the development expects some participation from institutional investors in the commodities derivatives market from this year which will deepen the market.
“Deutsche Bank is expected to get a green signal from SEBI by October to provide custodial services and once the custodian thing will happen, we will see some participation from institutional investors in the commodities derivatives market this year,” a source close to the development said.
Besides, HDFC Bank and Stock Holding Corporation of India among others have approached the capital markets regulator to provide custodial services, he added.
SEBI guidelines
Under the SEBI guidelines, mutual funds need to appoint a registered custodian for underlying goods, given the physical settlement of contracts.
The issue of lack of participation from mutual funds in the commodity derivatives segment was discussed in the SEBI’s commodity derivatives advisory committee late August, sources said.
Apart from this, issues including Options offered by stock exchanges and gold spot exchange were also discussed, they added.
NSEL fraud
A committee, under the leadership of NITI Aayog member Ramesh Chand, had pointed out the importance of regulation in the spot market after ₹ 5,600-crore National Spot Exchange Ltd (NSEL) fraud was revealed 2013.
The committee appointed by the Finance Ministry submitted its report in February 2018 suggesting that SEBI should regulate the new gold spot exchange.
Earlier, SEBI was believed to have told the government that it did not have the skill set to regulate a spot market. Instead, it had suggested that regulation of commodity spot exchanges should be vested in a separate sectoral regulator.