SEBI on Wednesday said it will allow custodians to participate in the commodity markets. But market players are of the view that the concept of custodian will pick up only when settlement in commodity markets is made delivery-based instead of currently operational cash-based.

Custodian is a financial institution that holds the securities of investors/traders in electronic or physical form for safekeeping so as to minimise the risk of theft or loss. But since commodity markets follow cash-based settlement there is no give and take of delivery of any good and hence no need for a custodian, experts said.

India’s commodity derivatives trade is dominated by trading in energy contracts involving oil and gas, base metals, and bullion. But SEBI and the government are in the process of shifting the entire commodity trade to physical settlement. While in the bullion market, exchanges have started offering delivery contracts, the government wants new entrants in the segment — the NSE and the BSE — to launch only physical settlement for base metals. The MCX too has been asked to move towards physical settlement, source said.

Yet there is a view among experts that custodians will mainly come into play when large institutions involving foreign players come to trade on exchange platforms. While the agri markets have too many restrictions for foreign portfolio investors to trade, they are not interested in trading in crude and metals in India as they do it on global platforms. But foreign players could be interested if India links the settlement price of its commodity instruments to the domestic price, experts say.

There is a view that domestic corporate houses and metals and mining traders will be able to play if contracts are linked to Indian metal prices. Also, the entire domestic trade could move to the exchange platform if contracts are made delivery-based. In such a scenario custodians could come into play.

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