Home / Market / Stock-market-news /  A year after Sebi-FMC merger, regulator plans to unveil a slew of reform measures

A year after Sebi-FMC merger, regulator plans to unveil a slew of reform measures

Following the fraud at the National Spot Exchange Ltd in 2013, the Forward Markets Commission was merged with Sebi on 28 September last year. Photo: Aniruddha Chowdhury/MintPremium
Following the fraud at the National Spot Exchange Ltd in 2013, the Forward Markets Commission was merged with Sebi on 28 September last year. Photo: Aniruddha Chowdhury/Mint

The Securities and Exchange Board of India may allow options contracts for trading on commodity derivatives exchanges to increase the product range for investors

Mumbai: The Securities and Exchange Board of India (Sebi) is preparing to unveil a slew of measures to enhance liquidity and curb potential risks in commodities trading, a year after the commodity market regulator was merged with the capital market watchdog, said two people familiar with Sebi’s plans.

In a fallout of the Rs5,574 crore payments crisis at the National Spot Exchange Ltd (NSEL) in 2013 that turned out to be a fraud, the Forward Markets Commission (FMC) was merged with Sebi on 28 September last year to strengthen regulations and enforcement in the commodity market space.

Following the merger, Sebi has put in place a number of stricter norms, akin to equity market rules, for commodity market participants, products and exchanges. Experts say the effort is still a work in progress.

Sebi needs to find ways to increase the number of hedgers as opposed to speculators in the market, strengthen control systems at commodities exchanges and reinforce warehousing norms, especially for agricultural commodities, the experts say.

Also Read: Timeline of commodity derivatives market reforms after Sebi-FMC merger

“Currently, hedgers form only 15% of the commodity market participants. If liquidity in the market is desired, participation of hedgers is critical. Importers, exporters, manufacturers, traders and suppliers can become hedgers," said G. Chandrasekhar, an independent commodity market expert.

“Sebi must do something to strengthen the controls over commodity exchanges. Some exchanges have been abruptly banning commodity derivative contracts. This practice has to be stopped and discouraged. Stronger norms will be required to prevent exchanges taking such moves, otherwise the overall confidence and hence the liquidity will not improve," Chandrasekhar said.

As a part of the planned reforms, Sebi may allow options contracts for trading on commodity derivatives exchanges to increase the product range for investors and, in turn, the overall market liquidity by attracting more investors.

To begin with, options contracts may be allowed only for widely traded commodities, according to one of the two persons cited above.

“The regulator may now look at allowing mutual funds/commodity funds and permit options trading", moves which would broad-base the market, said Girish Dev, managing director and chief executive officer at Geofin Comtrade Ltd.

As a part of the plan, the exchanges may be given three months to put in place a framework ready to launch options trading in commodities.

The second person cited above said Sebi may spell out the norms on introduction of options contracts and new warehousing norms as early as Wednesday. Both persons asked not to be named.

At a Confederation of Indian Industry (CII) event on bond markets on Tuesday, Sebi chairman U.K. Sinha said the regulator is prepared to allow exchanges to launch options trading.

Two commodity exchanges—Multi-Commodity Exchange of India Ltd (MCX) and National Commodity and Derivatives Exchange Ltd—have said that they are equipped to handle the volumes that will follow with launch of options.

Not all agree that this move will be beneficial.

Chandrasekhar, for instance, says the market is not ready for “options" contracts.

“People do not understand the basics of commodities market and introduction of options will just not help at this moment," said Chandrashekhar.

The regulator will also finalize warehousing norms to increase transparency of deliveries.

In June, it unveiled a discussion paper that had suggested net worth and eligibility criteria for warehouse service providers and asked them to empanel auditors to independently audit stocks. It will now finalize these norms, said the two people.

Experts say that norms are also needed to ensure that quality of goods entering warehouses is kept intact.

ABOUT THE AUTHOR

Jayshree P Upadhyay

Jayshree heads a team of reporters focussing on legal, regulatory, investigative stories. She has worked for over a decade, reporting on financial scams, legal stories and the intersection of corporate and regulatory issues. She is based in Mumbai and has previously worked with Business Standard, Mint, The Morning Context and Bloomberg TV India.
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