Commodity markets regulator Securities and Exchange Board of India (Sebi) has decided to review the existing risk management systems, delivery mechanisms and procedures for supervising warehouses by commodity exchanges. For this, Sebi has set up a task force, which will submit its report in three weeks.
The regulator’s move follows the recent developments in agri-commodity derivatives. To curb volatility, Sebi had increased margins to trade across commodities. In chana contracts, almost 100 per cent margin was imposed because of spiralling prices and excessive speculation.
Sebi also reversed liberalisation in some of the position limits and the National Commodity and Derivatives Exchange (NCDEX) had to suspend castor seed contracts, one of its most liquid commodities, to avoid defaults.
When Sebi took over as commodities markets regulator in September last year, it added Section (44 D, 2) in the regulations to ensure guaranteed settlement of trade and delivery. Task force will examine whether the exchanges have complied with this provision.
Ensuring delivery is a sensitive issue in agri commodities, because goods are not standardised and there are several regulations governing the same commodity. There have been instances in the past when deliveries could not happen because of clash of regulations. For instance, a few years ago, delivery of NCDEX’s black pepper stock was affected because the Food Safety and Standards Authority of India had a different set of norms. More recently, chana delivery in a few warehouses in Delhi was not happening because the city government took a different stand regarding stock limit compared to the prevailing norms.
Commodity exchanges have to accredit warehouses where commodities traded on the exchanges are stored.
Those intending to deliver goods on an exchange have to deposit them in exchange-accredited warehouse; deliveries to buyers are made by these warehouses.
It is the responsibility of the exchanges to see that the warehouses follow proper processes for grading, storing and delivering goods.
“Agri-commodity market participants have tuned cautious after recent changes regarding position limits and suspension of castor seed contracts by the NCDEX. Quick response by the regulator to understand and solve issues of agri market should help soothe their nerves,” said a market participant, who did not wish to be named.
WATCHDOG IN ACTION
Sebi task force to submit report in three weeks
Settlement and ensuring good delivery have been made legally binding for exchanges
- Task force will also study if exchanges are prepared to comply with the new rules on deliveries