Sebi mulls MFs' entry in commodity derivatives

Regulator also in dialog with other sectoral regulators to permit banks and other institutions, said chairman U K Sinha

After ensuring a consolidating risk management and surveillance mechanism in commodity markets, regulator Securities and Exchange Board of India has now decided to broaden participation of other players in this segment. Sebi is also of the view to encourage competition in the commodity derivatives, which aims at no exchange having monopoly in any sub segment of commodities.

This was indicated by the Sebi chairman U K Sinha conversation with media today as it completed one year of commodity regulations.

Sebi has already permitted option trading in commodities and initially one agri commodity and one non-agri commodity will be permitted and asked exchanges to propose their plan on introducing option trading. "Their plan should include commodities in which they plan to introduce option, system and risk management preparedness and design the parameters and product," he said. According to reliable information, MCX has preferred gold or crude oil as its priority and NCDEX prefers guar, mustard seeds, soyaben seed and oil. Now exchanges will have to first select one and come with a plan. Exchang's have also been given responsibility to find out who will write options as option sellers or writers take real price Risk.

Subject to how exchanges prepare their option products, it is learnt that option settling in deliveries like in futures may be preferred. 

Regarding introducing more participants, including institutional participants, Sinha said, "Since mutual funds are under our regulations it would be easier to permit them for commodities but for other players (like banks, insurance companies etc) Sebi has already initiated dialogue with respective sectoral regulators."

However strong surveillance and risk management will be the most important criteria for expanding market and that was the reason why Sebi is observing caution in opening commodity derivatives for other products and players. 

Sebi is in continuous touch with its commodity advisory committee for other developments like making price polling mechanism transparent and increasing hedgers participants in the market for which sub groups have been set up.

On allowing stock and commodity exchanges to enter each other's jurisdiction Sinha said that risk management in stock exchanges has been made very robust, they have clearing corporations with strong settlement and guarantee funds.

"Best way to encourage competition is to assure all players current or potential that there is a fair rule which has to be followed by everybody and to try develop very active and vibrant market. Once that happen I think even we can have more players coming in, he said.

Sebi is yet to grant approval to BSE who had applied for trading in commodity space a year ago.

Derivatives in commodities, especially products like hedging are useful also for farmers, producers etc. "Farmers cooperatives, banks and other aggregators can on their behalf hedge on commodity exchanges," he explained when asked about how farmers would understand commodity hedging.

He touched upon yet another issue of uneven market share of various exchanges. For example at present MCX has 90 per cent share in total commodity derivative volumes. He said there is need to introduce more competition in the market so that for every segment within commodities there is a competition.

What he refrained from saying but was considered implied from his remark is that some new exchanges may be permitted.

Sebi has started focusing on warehouses recognised by the commodity exchanges and recently strengthened regulations for them which are quite stringent than before. He said: "Sebi has started inspecting warehouses to verify they store the quantity of commodities that they are showing under their storage and whether that quantities are matching the quality specified under the contracts that are traded. We have found some shortcomings in that and we are in touch with the exchange concerned to sort out issues and improve oversight of warehouses."

Government has imposed stock limits on various commodities but Sebi chairman confirmed that they wrote to the government to exempt those warehouses from stock limits, which are recognised by commodity exchanges.