Can SEBI–FMC merger work?

Sceptics have two views on what lies ahead with regard to SEBI-FMC merger. Views are that while the merger will be smooth, the commodities regulator will simply be a division under SEBI or no real changes will be effected.

Their alternate view is that despite the best of intentions, the differences in regulating markets as diverse as equities and commodities will actually stymie growth in commodities markets since the regulator will now try to drive both bulls with the same stick.

Then there are believers – like me. We have one view: Not only will the merger be relatively seamless but also the size and potential of commodities markets will help drive early learning and favourable policies to enable business growth in a safe environment.

The FMC has done a tremendous job in its new avatar after the advent of national electronic trading platform in early 2000s. It has been a regulator which believes in a secure growth, especially in later years.

The NSEL scam prompted the government to move it under the Finance Ministry. The stage was then set to implement one of FSLRC’s (Financial Sector Legislative Reforms Commission) key recommendations i.e. a unified regulator across financial products including capital markets, insurance, pension and commodities.

Expert supervision needed In practice, the merger between SEBI and FMC is a good idea which will become great if the implementation is done in the right spirit.

So, perhaps it is better that commodities should be a separate division under SEBI manned by specialised personnel familiar with commodities futures, physical trading and operations.

It will help to have knowledgeable people on board who are aware of the strengths and utility of commodities markets globally as well as have penal powers to address issues such as dabba trading.

Eventually, a common regulator will lead to a common clearing agency which will make funds management efficient for clients because a common margin across trading assets such as equity, commodities and currency will be possible.

Delivery mechanism The other important expectation is the increased number of participants such as FIIs, banks and mutual funds who are currently not allowed to trade commodity futures.

This goes hand-in-hand with more products required to attract such new participants i.e. indices trading and the like.

The introduction of new products can also have a domestic bias such as trading commodities with local specifications so that the same platform can be used for delivery.

The other objective step which can be taken immediately is the introduction of the spot markets within the futures markets.

So we can have delivery at, say, T+3 or T+7 basis, i.e., once you buy or sell you have to take or give delivery within a few specified number of days.

Single KYC will suffice Finally, one quick logical outcome which can be implemented immediately – no separate entity is needed for commodity futures trading and therefore, equity dealers with requisite certification should be allowed to trade commodities for clients.

This is similar to the situation today where equity dealers trade currency derivatives for clients if they are suitably certified.

Likewise, a single KYC across assets is not only logical but is also feasible now with this regulatory merger.

While iterative items such as repealing the FCRA (Forward Contract Regulation Act) and suitable changes in the SCRA (Securities Contract Regulation Act) to define commodities as a security, etc are implemented, the defining aspect of commodity futures trading of providing a platform for price discovery and risk mitigation should not be diluted.

Portfolio diversification Similarly, it should be kept in mind that the physical commodities market is much different from equities and the ecosystem includes key areas such as physical markets, warehousing and suitable changes for trading electronic warehouse receipts will have to be kept in mind.

Equity trading and investment clients can look forward to diversifying their portfolio on international norms across assets, while the ability to trade all assets on a single exchange with a common KYC and a common margin to the broker will be a big win.

Intermediaries will love the merger as it will enable seamless multi-asset broking; operating costs will come down and will also lead to efficient fund management. Yes, the SEBI-FMC merger is a game changer for the industry and, if implemented well, will benefit clients in the commodities as well as capital market segments. It is a bold step by the government which will definitely have a huge positive pay off.

The writer is President – Retail Distribution, Religare Securities. Views are personal.

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