Sebi proposes one commodity, one exchange model to make India price-setter

To deepen and grow commodity markets in India with an intention to make India a price-setter than a price-taker, the Securities and Exchange Board of India has proposed, ‘one commodity, one exchange’ plan even though currently multiple exchanges are allowed to launch contract on the same commodity to create competition and give choice to investors.

As of now, the Multi Commodity Exchange (MCX) is a major player in metals, precious metals and energy contracts, while National Commodity and Derivatives Exchange (NCDEX) in agriculture )segment and Indian Commodity Exchange (ICEX) in diamonds, paddy and steel. However, according to the regulator, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are not able to grow and the Sebi argues that if exchanges focus on a one or two commodities then they can grow meaningfully.

Sebi’s reason for moving to a new proposal is that under the existing system, exchanges' focus shifts to meeting competition rather than developing market in their own commodities and liquidity gets fragments in more than one exchanges.

An industry official said, “there is a need for an approach similar to the product patent for commodities contracts. When one exchange does proper research and launches a contract it is easier for others to duplicate that. Sebi’s proposal is good in that way because when one exchange brings some uniqueness, it gets time and enough incentive to develop and create liquidity in that contract.” He added that Sebi seems to be following a China-like model for an Indian commodity market.

So far India is a major consumer and producer of wheat, rice, pulses, spices, cotton, tea, rubber, iron ore, steel, gold, silver and diamonds.

In case of diamonds, rice, rubber, sugar, iron ore etc it is playing bigger role in global markets by being a major importer and exporter. But yet, India is not in a position to set the global price. In a concept paper issued recently on the subject, Sebi also cited global examples of some exchanges playing a significant role when they develop only one or two commodities.

For example, China has been a major producer and consumers of several commodities, but after it launched exchanges focused on certain commodity it started influencing global prices of those commodities and price discovery.

Dalian Commodity Exchange’s flagship commodities are soybean, iron ore and egg; for Zhengzhou Commodity Exchange it is PTA, apple and cotton; for Shanghai Futures Exchange it is rubber, says Sebi's concept paper. Shanghai Gold Exchange and Shanghai International Gold Exchange deals only in gold, silver and platinum.

Elsewhere in the world, this concept has been successful — London Metal Exchange is a leader in non-ferrous metals, Tokyo Commodity Exchange in rubber and Bursa Malaysia Derivatives Berhad (BMD) apart from others.

Sebi wants to develop similar model in India where exchanges will have to select a commodity in which only that exchange can deal and they have to develop market for that commodity in 3-5 years after which other exchanges may be allowed to enter.

Sebi has, however, said that when a particular exchange chooses to focus on a specific commodity to develop and bring liquidity in that, it should not misuse monopolistic position and ensure that market integrity is not compromised.

Sebi has also proposed that going forward, each exchange can select 2-3 goods from the notified list of 91 commodities on which no derivative products have been launched by any exchange. Sebi has offered exchanges which select such commodity or get some commodity included in the notified list can offer liquidity enhancement benefits and Sebi has shown a preparedness to relax daily and position limits and daily price limits in such cases.

Sebi has said the commodities which have been already launched by the exchanges for trading so far will continue as usual.

Narinder Wadhwa, President, Commodities Participants’ Association of India said that “single exchange, a single commodity is not advisable to approach and can make exchanges unviable. For the development of commodities markets the regulator should consider a proposal that when any exchange wants to introduce a contract which may be traded on other exchange than new entrant exchange should come out with some uniqueness in that rather than duplicating the existing contract.”