FMC may allow market makers in commodities

Following the recent move by the equity markets regulator, the Securities and Exchange Board of India (Sebi), the commodity derivatives market regulator, the Forward Markets Commission (FMC), may also introduce market makers.

A committee chaired by FMC member D S Kolamkar, after consultation with exchanges, has decided to recommend allowing market makers in two types of contracts. One lot are existing contracts that are not liquid on any exchange platform and then a new set of contracts yet to be launched. The move is set to help new and small exchanges to generate business volume in commodity derivatives. “We had called for views from exchanges separately nearly three weeks ago. Although they have not sent a formal communication yet, in separate conversations they are unanimous to allow market makers in illiquid and new contracts,” said Kolamkar.

Generally, around half a dozen of the active and most powerful traders are identified as market makers to generate volume in illiquid contracts. Market makers commonly offer two-way quotes, for both buying and selling, giving thereby an opportunity to traders to square off in case sellers are active in a particular contract or book afresh if buyers are ruling the trade. They are indirectly funded by individual exchanges to generate volume in certain segments.

In developed markets like the US, market makers have predominantly generated huge volume in active contracts on the COMEX, Nasdeq and CME. The same model was followed by the London Metal Exchange and the Shanghai Futures Exchange in China. Contracts on these platforms are predominantly dominated by market makers, to generate volume for exchanges.

Currently, Indian exchanges follow a market-driven system, in which share prices are determined by the sentiment. On a commodity exchange, however, a quote-driven system is prevalent in which traders only provide a one-way quote, either for the buy or sell side.

‘NOTHING FINAL’
“Earlier, exchanges’ views were divergent and a couple of them had opined that the time was not ripe to introduce such instruments to generate volumes on exchanges. They were favouring separate guidelines set by individual exchanges. But, they have now agreed upon a uniform guidelines across all exchanges. Nothing has been decided finally yet,” Kolamkar said.

He has not fixed a deadline forgiving his report, saying he’s also studying the development in the equity markets. Sebi, early this month, allowed stock exchanges to appoint market makers in the derivatives segment. These market makers, appointed and incentivised in a transparent manner, can operate for a maximum of six months.

B C Khatua, FMC chairman, said, “We are awaiting the report by the Kolamkar Committee to take a final call.” FMC, he says, is not in a hurry to introduce such instruments. The regulator will observe the consequences of a pilot project first, for a limited period.

“We, upon receiving response from exchanges, would allow it on pilot basis for a select period. Full-fledged market makers will be allowed only when the bill amending the Forward Contracts (Regulation) Act is passed in Parliament,” Kolamkar added. The Bill is likely to be tabled in the winter session. Of nearly 100 contracts allowed for trading on various commodity exchanges, close to 20 are liquid, while the remaining are illiquid. Some of the existing contracts are active on one exchange and illiquid on another.