Move for single regulator gathers steam

Finance ministry begins internal discussions.

The proposal for a single regulator for organised trading of all financial market instruments is gaining momentum with the Union finance ministry starting internal discussions on the issue.

Officials close to the development said the discussions were aimed at reworking the regulatory architecture of financial markets in line with the new challenges faced globally. This, they added, would reduce regulatory, policy and product arbitrage that existed due to multiple bodies regulating different segments of the market.

“Money is fungible across markets and multiple regulations leave scope for arbitrage in regulation as well as supervision. Thus, trading in financial instruments should be unified under a single body,” said an official.

At present, while the Reserve Bank of India (RBI) regulates over-the-counter (OTC) rupee-bond and currency markets, the Forward Markets Commission monitors futures trading in commodities and the Securities and Exchange Board of India (Sebi) regulates exchange-traded equity, spot and derivative markets.

Products like interest rate futures, which have an interest rate component and are traded on exchanges, are overseen by both RBI and Sebi. This is because RBI, the monetary authority, is responsible for interest rate regulation.

Sources said while there should be a single regulator for organised trading of market instruments, it is yet to be decided if an existing regulator could perform that role. Alternatively, a new agency could be set up or a unit could be carved out, with members from the existing agencies joining the body. A decision would be based on discussions with other stakeholders, said officials.

A common regulator was a key recommendation of the Raghuram Rajan committee report on financial sector reforms which had suggested bringing regulation of trading under Sebi’s purview. It felt consolidation of trading regulation would ensure economies of scale through improved liquidity and increased competition.

Earlier, though RBI supported the idea of having a single regulator for financial markets, it said it should perform that role given its expertise and a well-laid-down supervisory framework. It made a strong pitch for this last month too.

Officials were of the view that with multiple regulators, any market development and changes took a lot of time to filter since views differed when a product panned across regulatory turfs.

“Since we are already stressing conglomerate supervision, this could be a first step towards that,” an official said.