Soon, trade in commodities at a nearby bank

Soon, your neighbourhood banker would be able to offer you trading in derivatives of gold, crude oil or even some of the agricultural commodities. 

The Reserve Bank of India (RBI) has opened the way for large banks to enter commodity broking services, through subsidiaries. The move could help substantially expand the client base of the commodity derivatives market, at a time it is bringing in new products such as options. Large lenders, especially private ones such as ICICI Bank, HDFC Bank and Axis, have large securities companies and offer easy-to-transact three-in-one trading accounts. Given a large captive customer base, they account for 40-50 per cent of demateralised accounts in the country. 

However, till now, they were kept out of the commodities broking space, because of lack of clarity in banking sector rules and the RBI’s concern over the risk of allowing banks in the sensitive sector. The RBI had even pulled up a private bank for offering commodities futures to clients through its arm.

However, all that has changed with a clause added to the master directions on ‘Financial services provided by banks.’ Though sounding like a prohibition, it opens a new and promising business stream for banks. The RBI added a new Para 22 under the head of ‘Broking services for commodity derivatives segment’ in the master circular. It reads: “No bank shall offer broking services for the commodity derivatives segment of Sebi-recognised stock exchanges, except through a separate subsidiary set up for the purpose or one of its existing subsidiaries.”

The central bank also laid down conditions relating to risk control, net worth and business turnover requirements. Also, that the subsidiary could not have any proprietary positions.

“These conditions are par for the course. The bottom line is that banks may now offer commodity broking services through their subsidiaries. This opens huge opportunities for the sector,” said a senior commodity exchange official. The official added that the top two banks had a client base equal to that of the total client base of commodity markets. “The banks now have to set up subsidiaries and reach out to the exchanges and regulators for memberships. Then, they can tap their existing client base to offer an additional product.”

The central bank also laid down a framework for banks to become clearing member of the commodity derivatives segment. Conditions include minimum capital requirements, prudential norms on risk exposure, and effective risk control measures. “The bank shall not undertake trading in the derivative segment of the commodity exchange on its own account and shall restrict itself to clearing and settlement transactions done by trading members/clients on the exchange,” the additional clause in the master circular says.

While it allows the bank to meet pay-in obligations arising out of client trades, it makes clear that “the bank shall not meet pay-in obligations of any transaction other than what is required in its role as a professional clearing member.” At a time the broking vertical of established broking entities is shrinking, as they are keen to move up the chain by getting into lending operations with an eye on banking, the entry of banks could help commodity bourses take their products to the last mile, said a sector veteran.