In the modern history of investing, gold has retained its importance with the emergence of financial derivatives based on gold as the underlying asset. Traditionally, gold has always been considered a safe investment because not only has it traditionally been seen as a store of value regardless of economic cycles, but also because of the perceived intrinsic value associated with the yellow metal. The financialization of gold took root with the emergence of the Gold ETF which allowed an investor to gain exposure to this gold in portfolios. ETFs follow the price of real gold; you can’t take delivery of the metal when you need it.
A proper mechanism was needed for transparent discovery of the gold spot price. The Spot Gold Exchange and trading ecosystem through EGR, which have been notified as securities, will reduce market inefficiencies and help integrate spot gold trading with derivatives markets and pave the way for a flat – transparent shape for gold.
SEBI at its board meeting in September 2021 approved a gold exchange proposal, in which the yellow metal will be traded in the form of EGR and will help to have a transparent mechanism for discovery of national spot prices. India currently only trades gold derivatives and gold ETFs, unlike several other countries that have spot exchanges for physical gold trading. The holder of the EGR can continue to hold the EGR for as long as planned since the EGR will have perpetual validity.
An EGR holder, at their discretion, may also remove the underlying gold from the vaults upon delivery of such receipts. To reduce the costs associated with removing gold from vaults, EGRs have been made “fungible” and “interoperability between vault managers” will be allowed. EGR brings the interoperability of the physical and electronic form of gold comfortable for the investor
The SEBI unveiled on February 14, 2022 the trading functionalities relating to electronic receipts of gold (EGR) on the exchange platforms. With this notification, SEBI had completed the process of implementing the framework for operationalizing Gold Exchange in India after issuing a circular on January 10, 2022 for Gold Exchange – which is the trading ecosystem of EGR and physical delivery of gold, would be a national platform to buy and sell EGR issued against physical gold.
SEBI has issued guidelines on trading hours, trading fees by exchanges, pre-opening session call bidding, bulk and block trading, price ranges, unique client code , the Investor Protection Fund and the Investor Servicing Fund.
- Trading hours: According to the guidelines, trading on the EGR segment will be permitted Monday through Friday and exchanges may set their trading hours within the timeframe of 9:00 a.m. to 11:30 p.m./11:55 p.m. (in accordance with daylight saving time from the United States in the spring/fall). Season).
- commercial holiday: The list of holidays for EGR should be consistent with the list of holidays for derivatives markets to provide effective hedging support.
- During public holidays, stock exchanges may authorize trading in the evening session, ie after 5:00 p.m., in the event that the corresponding international reference markets are open.
Our view on the trade calendar and holidays – This is well thought out with a view to integration between spot and derivatives markets as well as it takes into account trading on other international exchanges.
- ·Call the pre-opening auction: The pre-opening session will last 15 minutes from 8:45 a.m. to 9:00 a.m., of which 8 minutes will be allocated for order entry, modification and cancellation, 4 minutes for order matching and confirmation of the trade and the remaining 3 minutes will be the buffer period to facilitate the transition from the pre-open session to the normal market. The session will close randomly during the last minute of order entry – anytime between the 7th and 8th minute of order entry. Such random closing will be driven by the system.
- Reference price – Only for the first day of trading of EGR, the exchanges will discover and disclose a reference price for EGR during the pre-opening session. This reference price would be discovered using the “Spot Price Inquiry Mechanism” as set forth in SEBI Circular no. SEBI/HO/CDMRD/DMP/CIR/P/2016/78 dated September 2, 2016. This one-time survey would be conducted one business day prior to the launch of EGRs on an exchange.
Our Take on Call option in pre-opening: It was kept simple and similar to the successful pre-opening mechanism in the equity segment. Similarly, there is a well-established spot price inquiry mechanism that SEBI notified in 2016 after taking over commodity derivatives regulation in 2015, which works well for international benchmark commodities. The equilibrium price, the pending order, the risk management is similar to the mechanism of the stock segment.
- Block the deal– A block trade window between 3:05 p.m. and 3:20 p.m. and the reference price for block trades will be the volume-weighted average market price (VWAP) of trades executed on the EGR segment between 2:45 p.m. and 3:00 p.m. and the order minimum size of Rs 10 crore.
- Wholesale – EGR bought/sold representing 5% of the market-wide limit will constitute a block transaction and the market-wide limit means the sum of the underlying gold, on which EGR was issued and outstanding, on all contracts launched by stock exchanges.
Our take on BLOCK and BULK Deal: Unlike the equity segment which has 2 deal block windows – morning 8:45-9:00 a.m. and afternoon window 2:05-2:20 p.m. and a minimum order size of 5 crore , SEBI has taken into account that the EGR is a new safety class and therefore only one window is allowed. We hope SEBI will revise this and maybe even allow 3 windows once liquidity picks up. However, the minimum order size is expected to be Rs 5 crore.
In the equity segment, a block trade is a trade where the total quantity of shares bought or sold is greater than 0.5% of the number of shares of a listed company. SEBI correctly considered the market-wide limit to be the sum of underlying gold, on which EGR was issued and outstanding, across all contracts issued by exchanges.
- Price range – The initial limit price of the price range will be set at 10% of the previous closing price. If the market moves in one direction or the other, the dynamic price ranges are relaxed by the exchanges in increments of 5%.
Our view on BLOCK and BULK Deal: Similar to scripts that have derivatives, SEBI has designed a suitable framework for EGR.
- Unique Customer Code (UCC) – For transactions in the EGR segment, it will be mandatory for members to have a unique client code (UCC) for all their clients transacting on the exchange. The exchanges will not allow trades to be executed without the uploading of UCC details by members of the exchanges. – E-PAN, members should verify the authenticity of e-PAN with the details on the IT department website and keep the electronic copy of PAN for their records.
Our take on UCC: This is natural because EGR is notified as a safety.
The financialization of gold is the need of the hour, including the priority of developing bullion exchanges that can focus on price discovery and provide an entire ecosystem of gold financial products and physical deliveries. EGR can realize the financialization potential of gold. SEBI established the framework to operationalize the Bullion Exchange. SEBI completed the process by releasing EGR’s thoughtful business features.
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