Sebi initiates process to integrate commodity spot and derivatives markets

The issue needs much more deliberation as spot market price discovery is inefficient

After meeting Finance Minister Arun Jaitley on Saturday, the board of Sebi, regulator for the financial markets, including commodities, has decided to take forward the issue of integration of the commodity spot markets and the derivatives markets.

Jaitley had proposed this in the Union Budget on February 1. The move is significant as even for the futures market, a transparent price for the relevant commodity traded in the spot market is required.

Some to whom Business Standard spoke said there were several challenges for integrating spot and derivatives. The latter are standard contracts, with specified allowances in grades. In the spot market, several varieties, qualities and grades of the same commodities are traded in the same market and they differ regionwise.

Also, there are now several forms of spot markets. One is the traditional Agriculture Produce Marketing Committees (APMCs), national electronic agri spot market platform (‘e-NAM’) — where at present hardly any trading is happening — and the state-level e-spot markets, known as the Karnataka model.

The minister had said in his Budget speech, “the commodities markets require further reforms for the benefits of farmers. An experts committee will be constituted to study and promote creation of an operational and legal framework to integrate the spot market and derivatives market for commodities trading. e-NAM would be an integral part of such a framework”.

With Sebi stepping into this, an expert says, “The regulator can use its experience in also regulating commodity futures for the spot markets.” In APMCs or wholesale markets where a large part of trading happens on a spot basis, “there is a lack of transparency and the traders’ lobby is stronger than farmers”. Which is why farmers get much less than what consumers pay for the same commodity, explained an official.

Separately, the finance ministry is considering a committee to discuss integration as proposed in the Budget. Vijay Sardana, an expert on commodity markets, said: “The committee should have experts who understand derivatives, the functioning of APMCs and the electronic market, apart from crop-specific issues.” The issue needs much more deliberation, as market price discovery is inefficient in spot markets — there is no national reference price. Another person, involved in electronic spot market trading, said: “As originally proposed, state-level electronic platforms should be allowed to be integrated with the national platform, e-NAM, as agriculture is a state subject and states should have the flexibility to select their platforms.”

Apart from integrating spot and derivatives, the minister asked the Sebi board on Saturday to look at “further integrating the commodities and securities derivative markets by integrating the participants, brokers, and operational framework”. This means allowing equity and currency trading exchanges, as well as commodities trading exchanges, to penetrate in each other’s areas.

The Sebi board has also discussed as part of its 2017-18 agenda the linkages among various markets — equity, forex, commodity, etc. And on allowing, in consultation with stakeholders and regulators, institutional participation in commodity derivatives markets. Another item on the agenda, apart from investing more in commodity research, is designing a system of risk-based supervision for commodity brokers.

Integrating of commodities and equity markets means allowing equity trading stock exchanges to penetrate into commodities, and for commodity exchanges to trade in equities and currencies. This will be a big reform as and when permitted but “may not be in the immediate phase”, said an official.