Home / Market / Stock-market-news /  MCX warehouse provider on Sebi radar for market manipulation

Mumbai: The Securities and Exchange Board of India (Sebi) has asked the Multi Commodity Exchange (MCX) to conduct an inquiry into allegations that its warehousing service provider (WSP) traded in mentha oil, a commodity it stocked, three people familiar with the development said. All three spoke on condition of anonymity.

“Sebi has sent a letter to MCX in the first week of September seeking that it act on its warehousing provider," the first of the three people said.

“The MCX warehousing service provider has traded in mentha oil, a commodity that is warehoused in its premises, which can be termed as market manipulation," said the second person quoted above.

Trading by a WSP in a commodity stocked in its warehouse falls in the realm of trading with inside information, and is therefore an activity frowned upon by the regulator. However, aspects pertaining to possible insider trading in commodities futures by warehousing providers are not covered under Sebi norms.

An email sent to Sebi on Monday went unanswered. An MCX spokesperson declined to comment.

Sebi’s letter to MCX comes just days after the capital markets watchdog notified norms for warehousing providers to ensure exchanges are able to guarantee settlement of trades, ensure delivery and avoid potential default risks. As per norms, an exchange can revoke the licence of the WSP and initiate legal proceedings if it trades in commodity futures.

Sebi specifically addressed the issue in its new norms as there was a lack of clarity on trading and other permissible activities by WSPs under the earlier regime when the commodities market was regulated by the Forward Markets Commission (FMC). Sebi and FMC were merged on 28 September 2015 in order to strengthen regulations and enforcement in the largely fragmented commodities market.

“To begin with, this is a good reactive step to check trades on solid inside information. However, this opens up a whole host of issues that the regulator would need to address going forward," said Girish Dev, managing director and chief executive of commodity brokerage Geofin Comtrade Ltd.

“Currently, there are a limited number of players in WSP. With time, conglomerates would venture here. To hedge their risks, they may want to trade in commodity futures and then such a blanket ban may not serve the purpose," explained Dev.

This is the third case this year where the regulator has laid the onus on the exchange for corrective action when the exchange systems have failed to detect alleged manipulation by market participants.

In March, Sebi had directed the National Commodity and Derivatives Exchange (NCDEX) to conduct an inquiry in the castor seed payments crisis. NCDEX had suspended trading in castor seed contracts fearing default to the tune of Rs1,000 crore.

In September, the National Stock Exchange of India Ltd (NSE) received a letter from Sebi seeking a forensic audit on allegations of unfair access by certain brokers.

“To begin with, they will need to depend upon exchanges for strengthening the surveillance, for Sebi to directly act on warehouses is difficult till such time the WDRA Act is amended," said Dev.

As per present norms, WSPs come under the Warehouse Development and Regulatory Authority or WDRA.

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