FMC has its way on gold ETF derivatives

NSE defers launch following objections over jurisdiction.

The National Stock Exchange has deferred the launch of derivatives based on gold exchange traded funds (ETFs) following objections from the Forward Markets Commission (FMC).

NSE was to launch futures and options (F&O) based on gold ETFs tomorrow. People familiar with the development said the commodity regulator objected on the grounds that options were not allowed in commodities.

Besides, institutional investors, including foreign institutional investors (FIIs), would gain a back-door entry into the commodity arena through such derivatives contracts, FMC said.

“In view of the concerns raised by another regulator, the exchange, in consultation with the Securities and Exchange Board of India (Sebi), has deferred the launch till further notice,” NSE said in a circular.

FMC was of the opinion that gold, being a commodity, fell under the ambit of the Forward Contracts Regulation Act (FCRA)and so should be regulated by it. The commodity futures regulator took up the issue with the government as it felt that Sebi was intruding into its turf.

“It was a constructive effort from us and we appreciate the steps taken by Sebi and NSE,” FMC Chairman B C Khatua said.

Another person familiar with the development said FCRA did not allow intangibles based on any commodity to be traded anywhere in the economy.” Since FIIs, banks and institutions are not allowed to trade in commodities in India, NSE’s trigger in launching gold ETF F&O contracts amounts to a back-door entry. Also options trading is not allowed under FCRA,” he added.

Industry players favouring FMC say the regulation of proposed derivatives on gold ETFs should come under FMC as the contract duration of the benchmark gold ETF futures is more than 11 days (the minimum stipulated days for the contract to come under the ambit of forward contract) and the underlying of the contract is a commodity (gold).