The Market Regulator, State Exchange Board of India (SEBI) by way of the powers conferred under the provisions of section 11 (1) of the SEBI Act 1992 along with the rule 77 of the SEBI (Mutual Funds) Regulations 1996 have stated a Circular. The said circular deals with the amendment in the norms involving Mutual Fund Participation in ETCDs by SEBI. The title ETCD stands for Exchange Traded Commodity Derivatives. SEBI had approved the participation of Mutual Funds in Exchange Traded Commodity Derivatives by means of Hybrid Schemes, which includes the following:
MUTUAL FUNDS
The term Mutual Fund indicates a company that is engaged in pooling money from the investors, and following that, invests the same in multiple securities, such as Stocks, Short Term Debt, Bonds, etc. Moreover, the consolidated holding of a mutual fund is known as Portfolio. Under this, the investors will purchase shares in the mutual fund, and each share represents the part of ownership in the fund and the revenue it generates.
Exchange Trade Commodities Derivatives
The term Exchange Traded Commodities Derivatives or ETCDs denote futures and options, collectively with a standardized contract, traded on recognized stock exchanges. Further, the most common Exchange Trade Derivatives cover Index, Stock, Currency, Real Estate Derivatives, and Commodities.
Also, Exchange Trade Commodities Derivatives can serve both individual commodities and a basket of several commodities and can work as an interesting alternative to negotiating commodities in the future market.
Different types of Exchange Traded Commodities Derivatives are:
The most widespread advantages of ETCDs are as follows:
Amendments in norms of Mutual Funds Participation in ETCDs
The objective behind the amendment in the norms involving Mutual Fund Participation in ETCDs are as follows:
Amendments in Mutual Funds Participation in ETCDs
In the Circular passed by SEBI, the main amendment made in the provision concerning Participation of Mutual Fund in Exchange Trade Commodities Derivatives is that mutual funds will not write options, or purchase instruments, together with embedded copied from now onwards options in goods, or on commodity futures. The foremost element to remember regarding the Participation of Mutual Fund is that besides the provision mentioned earlier, all the other conditions, requirements, and stipulations concerning such participation will remain likewise.
Current Scenario
Consider a mutual fund has taken delivery of 1 Kg of Gold on an exchange, then, in that situation, it can start a short position on a 1 kg contract of gold futures traded on that recognized stock exchange. That means this 1 kg will not be determined as Futures contracts and will promote the purchase or sale of an underlying commodity at an immediate price/ cost for delivery on any future date.
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