Sebi to come down hard on illiquid commodities

Commodity markets regulator Securities and Exchange Board of India (Sebi) might suspend trading in commodities or contracts that are illiquid, according to sources. A decision is likely in the next few weeks, sources added.

After becoming the commodity markets regulator following the merger of the erstwhile regulator Forward Markets Commission (FMC), Sebi has been focusing on improving the risk management of commodity exchanges. It has also been trying to introduce new products and allow new participants in commodity derivatives.

“Sebi is also looking at plugging the loopholes in regulating commodities. All three mainline exchanges have commodities that are generating zero volumes or their contribution is very thin in overall volumes. These illiquid commodities can be potentially misused for speculation,” said a source.  

According to trading data for September, out of 29 commodities on the Multi Commodity Exchange of India (MCX), 10 are either generating zero volume or contributing less than half a per cent of the exchange’s volumes.  Four commodities are contributing between 0.5 per cent and one per cent of volumes. Some of these commodities are mini contracts or different varieties of some highly traded commodities. In September, MCX’s average daily trading volume was Rs 23,756 crore.

Similarly, the 27 listed commodities on the National Commodity & Derivatives Exchange (NCDEX), 11 commodities aren’t traded. The September average daily volume on NCDEX was Rs 2,246 crore. Due to actions such as suspension of castor seed and chana and high margins on sugar futures, NCDEX has seen a sharp fall in volumes.  Commodities not traded include agri-commodities as well as non-agri commodities.  

Ahmedabad-based National Multi-Commodity Exchange of India, which is known for trading in plantation crops, has six commodities listed. But, the Exchange’s daily average volume is only Rs 147 crore.

“Sebi’s worry is that thinly traded or illiquid contracts or commodities can be misused for artificially raising or suppressing prices and influence the physical market. However, for deciding what constitutes illiquid commodities, Sebi is reviewing various criteria including absolute trading volumes, and the number of participants etc, but the final decision is yet not taken,” said the source cited above.  

FMC had also tried to address the issue of illiquid commodities. However, some commodities that are big in size have not seen a pick-up like wheat and rice. In several commodities, government restrictions and market interventions created uncertainties for hedgers to take positions. This has been the case, especially in essential commodities. But, a few years ago, when cotton prices went up to above Rs 60,000 per candy (156 kg each), the government had to suspend exports.

TRIMMING THE LIST?

• Sources say markets regulator Sebi could suspend trading in commodities which are illiquid
   
• All three mainline exchanges have commodities which generate zero volumes
   
• According to September's data, of the 29 MCX commodities, 10 generate zero or less than 0.5% of the exchange's volumes while four commodities contribute between 0.5% and 1%