The Reserve Bank of India is understood to be looking at ways of allowing banks to trade in equity derivatives and commodities, including commodity futures.

According to sources close to the development, the RBI has proposed amendments to two key sections of the Banking Regulation Act to the governemnt. The amendments will enable banks to trade in equity derivatives as well as commodities.

While the amendment to Section 6 of the Banking Regulation Act will deal with equity derivatives, changes to Section 8 will lead to the commodities market being opened to banks. Once the amendments are made, banks will be able to trade in commodities and commodity futures. These amendments could be expected only after the new government was installed at the Centre.

At present, even if banks want to provide clearing house facilities to commodity traders, they need RBI permission. However, sources maintained that even if banks were allowed to trade in equity derivatives, their exposure would in all probability be contained within the limit of equity market exposure set for banks. At present, banks can invest up to 5 per cent of their net demand and time liabilities in the equity market.

Under the current norms, banks are neither allowed to trade in equity market derivatives nor in commodities. Even if some banks are active in fixed-income derivatives, the contract notes entered into between players in the derivatives market have no legal sanctity. This has been one of the reasons for public sector banks keeping away from the derivatives market.

With the passage of the Securities Contract Regulation Act, banks are able to participate only in exchange-traded derivatives, with a legal cover.

Even though banks have been allowed to get into over-the-counter derivatives such as currency options, the legal validity of the contract notes is unclear.

Among commodities, banks are allowed to deal in gold. According to bankers, if the proposed amendments come through, banks could participate as trading members on the commodities exchanges.