YEAR IN REVIEW. Commodities trading: Proactive regulator ups bourses’ stock

The series of reforms kicked in by the market regulator SEBI (Securities and Exchange Board of India) over the last one year augurs well for commodity derivatives markets. Taking over the regulatory reins from the Forward Markets Commission, SEBI has introduced some bold steps by allowing re-launch of some of the agriculture contracts which were suspended due to manipulation.

In January, SEBI gave permission to the National Commodity & Derivatives Exchange Limited (NCDEX) to re-launch its castorseed contract after a hiatus of almost one year. The exchange had suspended trading in the contract due to excessive speculation testing the integrity of market. SEBI stepped in to clean up and ordered a forensic audit that led to the banning of 16 entities from accessing the market.

Similarly, the chana contract was re-launched in July to bail out farmers facing a bumper crop and weak prices in the spot market. The price-sensitive agriculture commodity has hogged the limelight for the all the wrong reasons as the regulator and the government were worried more about large-scale speculation in online commodity exchanges sending wrong price signal to the spot market.

Agri-commodities with comparatively lower production and concentrated in select States have been the hotbed of speculation. Though dealing with delivery in agriculture commodity was a new ball game for SEBI, it has done well by making the exchange responsible for quality and quantity delivered on its platform.

Lifting the long-standing ban on some commodities, SEBI has widened the market by allowing new participants to trade on the exchange platform. It recently gave permission to Category III Alternative Investment Funds to take trading position in commodity markets. These funds, which collect money from high networth investors, deploys them in risky assets to generate high returns. In all probability, mutual funds would be the next to enter the commodity market.

Despite the conducive regulatory environment, the turnover on commodity markets has remained lacklustre largely due to the fall in most agriculture commodity prices and weak trends in bullion.

The turnover on MCX, the country’s largest comex, was down 17 per cent this year at ₹50.47 lakh crore (up to December 22) against ₹61.11 lakh crore logged in the same period last year.

Similarly, the agriculture-focussed commodity exchange NCDEX’s turnover was down 18 per cent at ₹5.31 lakh crore (₹6.51 lakh crore).

While the Indian Commodity Exchange logged a turnover of ₹770 crore since its launch two months back, the turnover on the Ahmedabad-based National Multi Commodity Exchange, which is in the process of being merged with ICEX, registered a rise of 29 per cent at ₹66.49 lakh (₹51.68 lakh).

Ajay Kumar Kedia, Director, Kedia Stocks and Commodities said the re-launch of two agriculture commodities — chana and castorseed — somewhat minimised the impact of the sharp fall in commodity prices.

Notwithstanding the teething trouble, the launch of gold options has been the cornerstone of reforms in the commodity market and is expected to bring down hedging costs for participants significantly. The NCDEX will soon launch options trading in guarseed.

The development of options contract on the futures market post expiry is one of the major drawbacks and is pushing up the trading cost. The tough criteria set by SEBI on average daily turnover of ₹100 crore for a commodity to be eligible for options has virtually shut the door on many commodities which otherwise would have attracted investor interest.

Nevertheless, SEBI is considering allowing market-makers in options to boost volumes. Market-makers are those who provide quotes on both put (sell) and call (buy) side of options trading. They do this for a fee which is decided by the exchange and approved by the regulator.

SEBI had turned the fortunes of broking firms to offer both commodity and equity trading on a single platform. The regulator also allowed subsidiaries of banks to become the clearing members of commodity exchanges but restricted them from trading on their own behalf. This decision would take the benefit of commodity futures trading to rural India.

Nirpendra Yadav, Senior Commodity Analyst, Swastika Investmart, said while 2017 has been a big let down for bullion and energy, base metals had a dream run due to signs of economic revival across the globe and production disruption. The bull run in equity is expected to continue globally which may suppress investor interest in bullion in 2018. However, geopolitical tensions may provide a major tailwind for bullion prices, he added.

Anil Ambani Group-anchored Indian Commodity Exchange made a re-entry with the launch of world’s first futures trading in diamond. It received a mixed response despite India being the largest centre for cut and polish diamond trade. Eight out of every 10 diamonds sold globally are cut and polished in India. The exchange completed its first diamond futures contract settlement with the total traded quantity in November expiry for 5,382 carats valued at ₹173 crore.

A total of 1,440 clients participated in the delivery process and 26.27 carats of diamonds worth ₹83 lakh were delivered. The exchange fixed ₹3,166 per one cent as the price on due date, while the three-day average of November futures closing price was ₹3,168 per one cent, indicating a convergence between spot and futures prices.

The diamond contract has opened up a new avenue for the industry starved of credit. By depositing the cut and polished diamonds in exchange-accredited vaults, industry players can raise loans from banks by pledging the warehouse receipt s.

While most industry players and investors are interested in diamond futures contracts in the exchange, they see the lack of any other liquid contracts, especially that of bullion, as a major drawback for investors. Will the commodity derivative trading take wing with the backing of progressive and reform-oriented regulator like SEBI or buckle under the government concern over speculation in agriculture commodities? Some anwers may come in 2018.

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