Market regulator, the Securities and Exchange Board of India (Sebi), has directed commodity exchanges to conduct a performance review of all commodity derivative contracts on annual basis and present reports to it by June 30 every year. Exchanges have to also disclose these to the public. The move is important because it will bring to light the utility, hedging and other key aspects of all contracts.
In a circular date February 4, Sebi has asked commodity exchanges to furnish a balance sheet of all commodities including volume and open interest, along with trading on their platforms. They also have to provide the list of 10 major producing and consuming countries. Apart from the global balance sheet, the regulator has asked exchanges to tender details of each commodity from domestic perspective as well with production and consumption scenario locally.
Publishing global and domestic data of all commodities is expected to help hedgers and other participants to understand the market sentiment and take positions accordingly. This would also help exchange participants to avoid default in case of extremely volatility.
“The rational of having the derivatives market in agricultural commodities is hedging and hence, understanding this market is very important. The details of commodities and participants give more comfort to traders. This will boost confidence of traders and strengthen entire commodity eco-system,” said Kapil Dev, Head (Agribusiness), National Commodity & Derivatives Exchange Ltd (NCDEX), India’s largest exchange facilitating futures trading in agricultural commodities.
Apart from that, the regulator has also directed commodity exchanges to furnish details of participants’ type. This means, commodity exchanges would have to share details of different categories of participants like, farmers, hedgers, users and farmers’ producers’ organisations (FPOs), among others.
Sebi said in its circular issued today, “It is imperative to have a framework to evaluate the performance of these contracts based not merely on statistics regarding delivery and trade volumes but also on the strength of a comprehensive empirical assessment after considering all relevant information pertaining to the performance of a derivative contract during the relevant period of time.”
Sebi has also asked exchanges to discuss these with their product advisory committees and then disclose them prominently on their websites.
“With this, commodity exchanges would have to share their data with the Sebi. This was very much required and would bring in more transparency into the system,” said Narinder Wadhwa, President, Commodity Participants Association of India (CPAI).
Sebi said this comes in to effect from April 1, and applies to all contracts in FY20.
With this circular, commodity exchanges are required to present details of lifecycle and varieties and grades of commodities found in India, major changes in the policy governing trade in the spot market of the relevant commodity. Additionally, Sebi has directed exchanges to provide details of geo-political issues in the commodity and its impact on Indian scenario also.
“The whole idea is to align spot market with futures market,” said Naveen Mathur, Director (commodities and currencies), Anand Rathi Shares and Stockbrokers Ltd.
According to Dev, globally on exchanges, open interest to production usually remains at 20-30 per cent globally. Again, volume to open interest stands at around 30 per cent, he said.
“In terms of agricultural commodities, India is at par with volume to open interest ratio. Open interest is high and volume low due to involvement of day-traders and other such participants including arbitrageurs. So, publishing these data would certainly give a positive perspective to commodities trade in India,” Dev added.