The Securities and Exchange Commission of Pakistan (SECP) is learnt to have allowed asset management companies (AMCs) to offer commodity schemes to investors taking into account the record appreciation in global commodity prices. According to an SECP announcement issued on Tuesday, the introduction of commodity scheme as a particular class of collective investment schemes (mutual funds) was a longstanding demand of the local market. Following a comprehensive study of the market demand, the SECP decided to allow a new category of commodity funds.
The introduction of new class of commodity funds will facilitate AMCs to broaden their product range by offering commodity schemes to investors in addition to their conventional equity, money market and income funds. This will also enable small investors to take potential advantage of gains promised by the commodity market such as Gold through pooled investments being managed by professional fund managers, SECP said.
Ccommodity as an asset class was available on a limited basis through investment in mutual funds, as some funds offered upto 20% exposure to gold through investment in gold futures contracts. However, no dedicated commodity fund could be launched to cater the growing demand for commodity trading through mutual funds. The SECP also devised minimum requirements for such a scheme after thorough consultation with market participants and in accordance with best international practices.
As per prescribed requirements, investment in commodities by a fund can only be made through future contracts which are traded on an organised exchange such as Pakistan Mercantile Exchange and having commodities as the underlying assets. The commodity funds are required to invest at least 70% of their assets in commodity future contracts which include both cash settled as well as deliverable contracts. The deliverable contracts, for the time being, have only been allowed in gold as mechanism in place with exchange in term of physical delivery.
In order to ensure sufficient liquidity, commodity schemes must maintain at least 10% of their net assets in cash and near cash instruments. Further, such schemes as in case of other mutual funds that attract investment from the general public have been prohibited from gearing or leveraging. For managing commodity scheme, fund managers are required to have in place requisite infrastructure and skilled human resources.
The launch of commodity funds are expected to encourage savings culture in Pakistan by allowing investors to choose from a more diverse range of investment options and contribute to the development of the capital market, SECP added. Sources said with record appreciation in global commodity prices, commodity funds have been growing in popularity world-wide. The commodity as an asset class was available on a limited basis through investment in mutual funds, as some funds offered upto 20% exposure to gold (through investment in gold futures contract) as a commodity. However, no dedicated commodity fund could be launched and for this reason there was a need to introduce this particular class of mutual fund.
Therefore, keeping in view the demand of our market and global economic trends, a joint committee was composed comprising of members of MUFAP and officers of SECP, in order to determine the key investment parameters and restriction for introduction of a new category of Commodity funds. Based on the findings of the committee and internal discussions, the requirements were introduced through a circular.
The key features of such commodity fund revealed that the investment of at least 70% in commodities through commodity futures contracts that are traded on a recognised exchange, to ensure that a Commodity fund stays a dedicated commodity fund and investors who invest in such funds are able to take at least 70% exposure to commodities. No leverage or gearing is allowed and fund exposure in commodities cannot exceed 90%so that Regulatory framework is complied with and the fund does not maintain a net sell position. Moreover, the said requirement will mitigate risk.
The requirement of maintaining atleast10% exposure in cash equivalentsis added for liquidity purposes and to enable fund in withstanding redemption pressures, while mitigating risk (primarily liquidity risk). Moreover, the fund managers have also been required to have requisite infrastructure / systems and capable human resources for managing such funds.
The funds will take exposure through investment in exchange-traded commodity futures through cash-settled futures contracts except for gold for which they may also take delivery (gold allowed due to the mechanism in place with the exchange in terms of physical delivery).
A monitoring fee of 0.075% per annum of the assets of the commodity scheme as prescribed in the Regulations for money market schemes will be applied due to gold being a safe heaven investment and over the long run, gold funds will offer low risk and stable returns, therefore the fees on such funds will be closer to those of money market and fixed income funds.
Miscellaneous requirements such as Forward pricing while considering the closing time of international commodity exchanges, exchange rates declared by State Bank of Pakistan since most commodities are being traded in US Dollars and relaxed broker limits due to limited number of commodity brokers on PMEX, were also introduced for smooth operation of such funds and fair valuation of their assets, they added.
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