Soon, new products in commodities derivatives

Sebi assures it will put in place a framework for listing of stock exchanges

The Securities and Exchange Board of India (Sebi) on Monday took over the reins of the commodities derivatives market. Assuaging concern that surveillance and regulation would assume priority over development, Sebi Chairman U K Sinha said new products and participants could be introduced in a few months.

At an event at which Finance Minister Arun Jaitley formalised the merger of the Forward Markets Commission (FMC) with Sebi, the market regulator said it was open to allowing products such as options and index futures in the commodities market, as well as new participants such as banks and foreign portfolio investors.

“Our immediate focus is to ensure stability and credibility in the commodities markets and ensure there are no disruptions in the functioning of commodity exchanges,” Sinha said. “Our efforts would be to move in a cautious direction to ensure we provide some comfort to the market and to all participants, that the way transactions in commodities futures are at least as robust as they are in the securities market.”

Jaitley said, “The merger will increase the economies of scope and scale, as there are strong commonalities between all kinds of trading. I am sure Sebi is prepared to regulate the commodity derivatives market.”

Shaktikanta Das, secretary in the Department of Economic Affairs, said “A balance is needed on price stability and policy certainty. Sebi has to ensure prices do not become volatile and, at the same time, also see that there is policy certainty.”    

The market regulator also assured it would soon put in place a framework for listing of stock exchanges. Following the Sebi-FMC merger, India's only listed bourse, the Multi-Commodity Exchange, will de facto be listed under Sebi regulations.

The regulator is set to come out with additional guidelines for listing of exchanges. "We were waiting for the merger to happen first," Sinha said.

Established in 1953, FMC oversaw the commodities market for about 60 years. It, however, lacked various powers, which resulted in inadequate surveillance and alleged irregularities in this segment. To check these, a merger with Sebi was proposed 12 years ago and, subsequently, by two reports — one by a finance ministry-constituted panel and the other by the Financial Sector Legislative Reforms Commission. In 2010, the government also proposed amendments to the Forward Contracts and Regulations Act (FCRA).

WHAT LIES AHEAD

• Sebi will handle all legal cases FMC is party to
• New investors such as FIIs, banks and institutions await ministry clearance
• Commodities brokers to adapt to Sebi regulations in a year
• Commodity exchanges to touch a net worth of Rs 100 crore by 2017
• Exchanges will corporatise and demutualise in a year
• Exchanges to segregate regulatory department from others in six months
• Such exchanges will have oversight, product committees in three months

COMMODITY DERIVATIVES IN NUMBERS

• 3 national exchanges are active, along with 3 regional ones; no trading at 3 national exchanges
• 3,000 commodity brokers are members of national exchanges and 450 of regional bourses
• Rs 26,000 crore is the average daily turnover, against Rs 42,000 crore two years ago
• Rs 115.6 lakh crore was the aggregate volume of all exchanges in FY14; in FY15, this fell to nearly half; in the first six months of FY16, it stood at Rs 33 lakh crore

“In the present form, the Act did not adequately address regulatory requirements. There was a need for efficient regulation of the commodity derivatives market. There were two possible approaches to address the issue --- by amending the FCRA on the lines of the Securities Contract and Regulation Act or by merging the two regulators. The second approach was preferred by the government," Jaitley said. He, however, added Sebi would face challenges in regulating commodities, as underlying assets wouldn't be under its control. Spot trading in agri commodities has to adhere to state regulations.

The finance minister said the merger would widen the size and scope of markets, adding Sebi must ensure commodities trading was free of speculation.

Sinha admitted in the past, Sebi had made mistakes. "As far as commodity markets go, we will try to avoid making mistakes, avoid taking mis-steps. We will try for better convergence of prices from the physical side," he said.

Sebi would also put in place a mechanism for new entities seeking to do business in both securities and commodity markets, Sinha said, adding the focus was to ensure high-quality physical delivery would be the new regulator authority's starting point. "We will have ensure a balance between market development and deepening the market."

Sebi has created a separate commodity derivatives market regulation department for exchange administration, market policies, risk management and products and handling of inspections and complaints in this segment. Additional divisions for intermediary registration, surveillance, investigation, enforcement, regulatory assistance and research have been set up within existing Sebi departments.

Ramesh Abhishek, the outgoing chairman of FMC, said, "This will help substantially in bringing better regulation and discipline in the market by using regulatory resources and Sebi's powers. The merger will also pave the way for development of the commodities market to its true potential."