Norms for agri commodity derivatives may be tightened

Wants exchanges to play a bigger role in settlement and delivery, forward trading, spot exchange and specially delivery-based settlements

With the Securities and Exchange Board of India (Sebi) set to regulate commodity derivatives from Monday, it is considering strengthening the norms relating to risk management for agricultural commodities derivatives, which account for a fifth of the overall volumes.

The regulator has identified various focus areas, including exchanges playing a bigger role in settlement and delivery, forward trading, spot exchanges and special delivery-based settlements.

Sources privy to the move said Sebi wanted to streamline clearing and settlement, especially delivery-based settlement that is largely applicable to agri commodities.

“All commodity exchanges shall ensure guarantee for the settlement of trades, including good delivery,” the regulator has said. It wants exchanges to become the central counterparty to all deals and guarantee settlements. This is possible when exchanges set up clearing corporations, for which the regulator has given them three years.

For agri commodities, exchanges ensure good delivery and settlement but aren’t the central counterparty because of several government norms such as stock limits, as well as quality issues. The National Commodity & Derivatives Exchange (NCDEX), the market leader in agri commodities trading, has a subsidiary called NCDEX e-Markets, earlier known as the NCDEX Spot Exchange. Sources said Sebi wanted NCDEX to exit this company.

“NCDEX e-Markets isn’t a spot exchange; it is an auction platform or a service provider. Both equity exchanges have subsidiaries that offer similar services and should be viewed in that context. Government enterprises also use the services of such platforms to procure commodities for market operations,” said a source.

Another issue Sebi is understood to have raised is the forwards segment launched by NCDEX and the National Multi-Commodity Exchange of India. In the forwards segments, there are no standardised contracts; buyers and sellers report deals on the exchange’s platform. In case of a default, the loss to other party is made good by paying 90 per cent of the margin collected. Sebi has sought the exchange be made the central counterparty in this case.

A source said, “The regulator has not finalised anything on this yet.”

In the equity derivatives segment, lot sizes have been increased to ensure small investors stay away. “The regulator is thinking of taking similar measures for commodity derivatives, too. If that is done, mini contracts of commodities might lose attractiveness, as their size will increase. Some contracts are providing good liquidity and participation from small traders,” said a source.