Stricter proprietary trading norms in commodity derivatives

Commodity exchanges ordered to amend provisions and bye-laws to launch proprietary trading in alignment with equity exchanges

Further tightening the norms in commodity derivatives trade, The Securities and Exchange Board of India (Sebi) has asked commodity exchanges to adopt the same proprietary trading  practices as in securities markets.

In a circular issued on Monday, the regulator ordered commodity exchanges to make necessary amendment in the existing provisions and bye-laws to bring proprietary trading in commodities exchanges in alignment with equity exchanges.

According to trade sources, brokers currently take front-end positions in commodities exchanges in proprietary (pro) account which are later transferred to the clients' accounts through modifying client's code i.e. client code modifications (CCM).

"Once this circular is adopted, such practices would stop," said a senior official with a leading brokerage firm.

Trade sources estimate around 25-30 per cent trades get executed under pro-account as on today which after the circular would come down significantly.

Earlier, Sebi had asked exchanges to use CCM tool only in extreme cases. The current circular, however, is meant to increase the transparency in the dealings between the stock broker and the clients in commodity derivatives market. Now, it has been decided to align the provisions relating to the proprietary trading carried out by the stock brokers of commodity derivatives exchanges in line with the securities market.

Sebi's circular dated November 19, 2003 also cites proprietary should be done only from the registered office of the broker which has been adopted by equity brokers. Currently, proprietary trading is executed from office of the brokers anywhere across the country.

Sebi asked brokers to make disclosures available to clients. This circular supersedes all previous circular in this regard. All exchanges need to inform the Sebi with the status of the implementation of the provisions in the Monthly Development Reports.