Sebi ensured smooth transition in one year of commodity regulation

Market is keenly awaiting the regulator to introduce new products like option trading

As the Securities and Exchange Board of India (Sebi) is completing a year of regulating commodities, the market is keenly awaiting new products like options trading and other products like index futures and options and participation of new players.

A discussion paper on how Sebi proposes to introduce options can be expected anytime soon, said a source. However, index futures are likely to take a few weeks and convergence of equities and commodities trading, as per reliable information, may take some time. It would only happen once Sebi is satisfied that commodity exchanges are prepared to handle competition.

On the reports that options trading may be permitted soon, stock price of MCX, the only listed commodity exchange, closed 7.4 per cent higher at Rs 1151.05 on BSE, which is also its 52-week high. Sebi has ensured that the transition is smooth. Several measures are aligning commodities market with equity derivatives. However, one observer of regulatory actions said “These measures ensured that speculators follow hedgers, who should be brought in front, as the intention is to use commodity derivatives as a hedging tool and speculators are liquidity providers and the transition was handled in a structured way. Now, with introduction of new products, growth of the market will be in forefront.”

An industry participant said something different. “The biggest risk in replicating success (achieved in equities in to commodities) is that one assumes one glove fits all. Sebi needs to safeguard against this tendency to deploy the same measures and yardsticks in the commodities markets without due considerations to the nuances in this space,” he said.

Along with several regulatory actions, the year was eventful for the exchange industry also. In January, NCDEX had to suspend castor seed futures to arrest default that could have followed. It had to forgo huge volumes as the commodity was among the largest volume generators. The issue was followed up by several actions where the exchange froze trading terminals of wrongdoers, improved its surveillance of physical market, refunded part of the losses from the funds collected from defaulters and most importantly, “Sebi took stringent enforcement action against a leading edible oil company which defaulted in castor seeds contract,” said an official.

“Sebi gave a message that monopolistic players which were controlling market indirectly and moving it cannot continue,” said an aggrieved oil trader. Sebi has now integrated commodity market surveillance online with its automated surveillance system to keep watch on commodity derivative market.

NCDEX MD & CEO Samir Shah said “We have comprehensively solved the castor matter and will soon approach the regulator for re-launch approval.”

Even MCX has applied to Sebi for introduction of a couple of agri contracts but agri market at present is in a consolidation phase. Sebi is focused on risk management and after advisory panel’s report is finalised, Sebi is likely to take up new contracts, said the source.