SEBI has given a green signal to Deutsche Bank to offer custodial services for silver bullion. The decision was announced on Thursday. In a statement issued by the bank, it has mentioned that the new position will help them strengthen their presence in the commodity market.
Commodity trading has a long history in India. In modern days, it has become a popular choice for investors to diversify their investment portfolio as it is less risky as compared to equity trading.
Currently, commodity trading happens through six exchanges, among which MCX (Multi Commodity Exchange) enjoys 95 percent market share in bullion, metals and energy trading. To strengthen the market further, SEBI, in September 2018, allowed institutional investors to trade in the commodity derivatives segment. But due to an absence of any licensed custodian in the sector, many institutional investors showed reluctance in participating in commodity trading. Deutsche Bank became the first SEBI appointed custodian for commodities when the regulatory body amended its custodian regulation policy which paved its way for the new role.
Institutional investment bodies like Alternate Investment Funds (AIFs), Portfolio Management Service (PMS) providers, and mutual funds now can participate in derivative trading for listed commodities. Earlier only mutual funds could invest in gold ETF. But the new set of rules will allow even foreign corporates, barring Foreign Portfolio Investors, with exposure to underlying assets to trade in commodities in the Indian market.
Why Deutsche Bank?
Deutsche Bank has recently completed 25 years in offering custodial services in India. It is one of the largest custodians in the Indian securities market, facilitating both domestic and offshore investors. Its track record and expertise in the domain made it a strong contender for the role.
The pivotal shift towards commodity market
In the current condition, performances of several asset classes were volatile. Segments like the equity market, real estate, and fixed deposits are seeing investors’ interest waning fast as economy performance dwindles. On the other hand, commodity trading is gaining strength. In recent time, commodities like gold and silver have done exceptionally well to attract investors’ attention. Indian asset managers, mutual funds, and AIF have shown their willingness to launch gold and silver ETFs and asset allocation with commodities like copper, aluminium, zinc, nickel, lead. In this condition, Deutsche Bank India, as commodity custodian is undoubtedly looking at great business possibilities.
In India, energy contracts are settled in cash, but bullions are settled physically, which makes the custodian a crucial partner in the trade. It is a role of high significance. Currently, the commodity market is controlled by two major players, MCX which controls 95 percent of bullion, metal and energy segment and NCDEX (National Commodity & Derivatives Exchange) which controls 85 percent segment in agricultural commodities. In such a scenario, allowing Deutsche Bank to offer custodial services for silver is undoubtedly a significant step towards decentralising the sector.