Spot exchanges: Game changer?

Three commodity exchanges have been operational, and there is now a regulator in place as well

While commodity futures exchanges that came with a national platform have changed the whole futures market with a well-regulated, transparent and efficient platform, spot commodity exchanges could prove to be the game changer for physical trading in commodities, especially agricultural commodities.

While three national-level spot exchanges have been operative for the last few years, there is now a regulator tasked with ensuring the planned and regulated growth of the spot commodity market. The regulator, known as Warehouse Development and Regulatory Authority (WDRA), has recently issued draft regulations for regulating spot commodity exchanges and warehouses, and the issuing and trading of warehouse receipts (WRs) in electronic form.

This exercise, if executed well, could prove to be a game changer.

At present these spot exchanges take separate licences from individual states to run an exchange where agri commodities can be traded. State laws stipulate that agri commodities can be traded only in mandis that have a licence from a state government. These mandis have a narrow geographical jurisdiction, and hence there is no nationwide market or single national price for any commodity traded in the spot or physical market.

The need for online national-level spot exchanges arises as the futures market, which is doing robust trading, settles agri commodity contracts based on spot prices. In the absence of nationwide spot prices, futures exchanges pool prices, which is not the ideal way. To be efficient, a futures market needs strong linkages with the spot or physical market.

The system will work like this. The warehouse will be registered with the WDRA, and follow rules and capital adequacy criteria as prescribed. It will issue a receipt to the person who has deposited goods in that warehouse. The receipt will be in electronic or demat form, similar to shares in demat form, and the receipts would be negotiable and be traded on the spot commodity exchanges.

All commodities having a similar grade and quality will be given identification numbers by the commodity e-registering agency. Such agencies will act like a registrar in the capital market and will come under the WDRA; they would need to have a net worth of Rs 100 crore. Like depository participants, this network will have commodity participants (CPs) through whom commodity demat will take place. They will play a role in transferring the ownership of the warehouse receipt holder.

Once the electronic negotiable warehouse receipt is issued, the holder can sell the goods through the spot exchange and ask its CP to transfer the WR in favour of the buyer. Until the last trader or actual user of that commodity picks up delivery, the process goes on and then the commodity will have to be converted back into physical form.

“Spot exchanges could be the game changer for the physical markets, as far as the development of physical trading in commodities is concerned. Once the full infrastructure and regulatory framework is in place, activities like grading, assaying, trading, storage and price discovery on a national level will be much more efficient,” said Rajnikant Patel, director, Reliance Spot Exchange.

But it is just a month ago that WDRA started issuing draft norms for electronic trading of WRs. WDRA will continue the consultation process, and talk to various stakeholders like spot exchanges, depositories and warehouses. It will also speak to the Forward Markets Commission (FMC), the regulator for commodities futures, as the FMC also gives accreditation to warehouses.

“We have issued draft norms and are in the process of consultation. We have set an internal target that in the current financial year we should be able to start,” said an executive with the WDRA.

“Obtaining licences from different states still remains to be done. It will be appropriate if national-level spot exchanges registered with WDRA could be given a national licence,” said Patel.