Home / Market / Stock-market-news /  FMC wants banks, FIIs barred in commodity space

Mumbai: Commodities market regulator the Forward Markets Commission (FMC) doesn’t want foreign institutional investors (FIIs) and banks buying and selling Indian commodities futures.

The regulator holds that allowing overseas entities to trade in commodities futures could mean too much flow of speculative capital, which may create imbalances in the market, said a senior FMC official who did not want to be identified.

“There is no chance that banks and FIIs will be allowed in the commodity space till the time FCRA and Banking Regulation Act are amended," this person added.

FCRA is short for the Forward Contracts (Regulation) Act, 1952.

According to a second person familiar with the matter, who also asked not to be identified, the regulator’s concerns also stem from the fact that unlike its counterpart in the equities market, the Securities and Exchange Board of India (Sebi), the FMC is currently not adequately equipped to monitor and regulate large institutional investors.

“The strengthening of FMC began less than a year back. Though things have improved, it still does not have enough manpower and machinery at its disposal like Sebi does. So, it will find it difficult to match the pace of surveillance and investigations with that of the trading activity of banks and FIIs," said this person.

A final decision is yet to be taken, the second person added.

Last year, a five-member committee headed by senior economic advisor in the finance ministry, D.S. Kolamkar, suggested allowing FIIs and banks in the commodity futures market to infuse more liquidity and lower the cost of trading.

“One way to reduce the cost of capital for the commodities trader is to make banks and other financial institutions an integral part of trading in commodity derivatives…. Foreign financial firms (both intermediaries and end users) should be permitted to participate in commodity futures trading," said the panel’s report.

Meanwhile, FMC is considering allowing foreign importers or exporters who are present in the physical market to trade on the exchange to hedge their risk.

All rules governing hedgers would be applicable to such entities that will have to submit documentary proof like an export order or other paperwork to prove their presence in the physical market, said the second person. He added that commodity-wise limits could be set to check market safety.

The report submitted last year did mention that FMC needs to create an explicit plan on developing organizational capacity and that the government should provide it adequate freedom to manage its human resources.

There is another problem in allowing large investors’ play in the futures market, say market participants—depth, with most futures trades being on precious metals and crude. Agricultural commodities see little trading, which means a big investor would pretty much control the futures markets for these.

“Participation by FIIs and banks in the commodity futures market is a welcome move but one needs to factor in the depth of the Indian commodity market before allowing such entities. Only a certain number of commodities offer the depth and liquidity for big-ticket transactions by institutions," said Naveen Mathur, associate director of commodities and currencies at Angel Broking Ltd.

In the fortnight ended 15 December 2014, combined total value of trading on all recognized commodity exchanges was 2.86 trillion, according to FMC.

Energy, bullion and metals accounted for nearly 86% of the turnover.

On the Multi Commodity Exchange of India Ltd (MCX), crude oil, gold, silver, natural gas and copper are the top traded commodities, while the National Commodity and Derivatives Exchange Ltd (NCDEX) sees the highest trading in castor seed, soya oil, guar seed, chana and soyabean.

MCX is the largest commodity exchange in the country in terms of market share of nearly 85%.

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