Wary of illiquidity, Sebi says no to any new commex futures

As the NSEL scam continues to rattle investors in the commodities market, regulator Sebi today ruled out allowing trading in any new commodity futures unless assured of sufficient liquidity.
"Sebi has been very careful in allowing trading in new commodities. We want to do that but we will be doing it very carefully. Unless we are assured that there's enough liquidity likely in some commodities, we will not consider that," chairman U K Sinha said here.
The decision comes almost three years after the Rs 5,600 crore scandal broke out at Financial Technologies-run National Spot Exchange (NSEL) in July 2013, which dealt a blow to the then thriving commodities markets.

The case is still pending with meagre recoveries and repayments to over 11,000 investors happening in bits and pieces.
Sebi took over the regulation of the commodities market in September 2015 after the Forward Markets Commission, which had the mandate to regulate the commodities trading including futures, was merged with the stock market regulator.
The NSEL scam was one of the reasons that led to the merger.

The government allowed futures trading in commodities only a decade ago but the market could not gain dept due to the absence of large institutional players due to government ban on their participation.

The Sebi chief also said they are continuously reviewing the risk management framework in the commodities segment and it will take a few more months to bring in a mechanism to the level of securities market.
"Price discovery is very complex. For example, the physical market is controlled by the states and there are many obstacles and measures under the Essential Commodities Act.. I am not saying it is good or bad but these are difficulties... and what is the actual stock, what is actual crop output, such information is not available to us well in time," Sinha said on the sidelines of Risk Summit organised by Thomson Reuters here.

Noting that surveillance and risk management framework in
commodities markets is developing, Sinha said the process of bringing the system at par with equities market will take a few more months as their review process of the existing mechanism is on.
"The risk management issue in the commodities market is at a stage which is not giving us a comfort that it is as advance as it is in the securities market. We've been continuously trying to improve that system through a series of measures. For example, we've weekly meetings with the exchange, we review the trades, we also use surveillance mechanism," he said.

On providing settlement guarantee fund (SGF) for the commodity bourse, Sinha said: "Before introducing core SGF through our SECC regulations we provided for this money to be set aside.
"The problem is that commodity exchanges do not have the clearing corporations and by law, three years time is being given to them to set up such facilities. We are engaging with them and preparing them on how this can be done at the earliest."
Although Sinha said that there is huge potential for growth in the commodities space, he cautioned that we have to approach it in a careful manner.

Even after a decade of operations, the commodities futures space does not have the intended volume in several commodities such as chili peppers, wheat and corn as institutional investors like banks and mutual funds are not allowed to trade in them.
And whatever public and institutional confidence the market had, has been dented badly by the NSEL scam.
Exchanges are required to maintain SGF as a cushion for any residual risk, and it works like a self-insurance mechanism in the event of a trading member defaulting on settlement obligations.