Working group recommends common clearing for commodity futures with Rs 100 cr net worth

Interestingly, one of the members of the working group Prof. Ajay Shah has issued a dissent note over the proposal

A working group set up by the Union finance ministry in June has recommended a common Clearing Corporation (CC) for trades on commodity futures exchanges.

Chaired by V K Sharma, its report was given on October 31. The ministry has put the report out for public comment.

One of the members, Ajay Shah, has dissented on the need for common clearing in commodity futures.

The majority recommendations are that a CC be set up with an initial net worth of Rs 100 crore, to be owned up to 51 per cent by commodity exchanges, with equal shareholding. It is to be for-profit entity, though profit will not be the sole aim.

PANEL SUGGESTIONS

• Common clearing corporation to have minimum Rs 100-crore net worth
• All commexes to have equal equity share, with maximum 15 per cent for a single exchange and combined share of up to 51 per cent
• One member of the group, Ajay Shah, dissented saying separate clearing helps at the time of a crisis
• Clearing Corporation will regulate warehouse receipts and their transfer

At present, exchanges have own in-house clearing or a subsidiary CC for clearing and settlement of trades.

To be regulated by the Forward Markets Commission, the commodity futures regulator, the proposed CC’s shareholders shall have only 40 per cent of the board seats. The other 60 per cent should be of public interest directors. Initially, it might allow commodity exchanges to keep a settlement and guarantee fund. It suggests an experts’ group to address technical and operational challenges of common clearing across exchanges. Regional commexes will get an option to join the CC or continue clearing activity under the exchange-promoted CC.

The proposed CC will have norms for delivery mechanisms and, apart from what is done by the Warehousing Development and Regulatory Authority, it will register warehouse service providers. Negotiable warehouse receipts and financing against these shall also be under the proposed CC. For keeping records of warehouse receipts, the CC will set up an electronic registry.

The dissent note of Ajay Shah says, “Our experience in India has shown that financial market infrastructure institutions can experience settlement crises. When such a crisis arises, there is greater safety in having multiple clearing corporations which are fire-walled from each other.”

He has given an example of the Calcutta Stock Exchange, which had difficulties in settlement in the year 2000 while the overall Indian equity market worked smoothly, as the National Stock Exchange and BSE continued working well. “If there had been a single clearing corporation and if this experienced a failure, then it would have been a very big problem for the economy,” he has said. “Until we are certain that a collapse of a clearing corporation can be ruled out, it is unwise to put all our eggs in one basket.”