Regulating commodities: Panel advises Sebi to focus on crisis avoidance

The recommendations were made in view of government's decision to merge Sebi and FMC

An experts panel has advised the markets regulator, the Securities and Exchange Board of India (Sebi), to first focus on understanding commodities markets and crisis avoidance before taking up developmental issues.

The recommendations were made in light of the government’s decision to merge the commodities market regulator, the Forward Markets Commission (FMC), with Sebi. The merger is expected to be effective from October.

An international advisory board set up by Sebi held a meeting last May at Goa, to discuss the scenario once the commodities regulator was merged with it. Sebi’s consultant Oliver Wyman was invited as external experts to attend the session.

The group advised the Sebi board “to conduct a thorough due diligence and gap analysis before articulating its vision for the commodity derivatives segment”. This was because the commodities markets operate in a different ecosystem, have legacy issues, and need domain knowledge for efficient regulation.

The big difference in commodities and equities is that commodities are also settled in physical deliveries, which require a different regulatory culture and mechanism along with a separate set of regulations. Sebi has been raising concerns relating to handling deliveries in its internal meetings.

Commodity derivatives also have a forward market segment and the NCDEX, an exchange having leadership in agri-commodities, is the market leader. However, Sebi has shown discomfort in handling this segment. FMC, according to sources privy to the development, had conveyed that forward deals were the safest and offered the least risk to the exchange on which they were traded.

The international advisory board, having expertise in understanding how commodity derivatives are regulated globally, has also advised Sebi to “concentrate more on studying the risks and the structure of the market, including various aspects like contract design, warehouse receipts, and quality control of underlying commodities in the initial period”.