Under one roof

The stock and commodity market regulator, the Securities and Exchange Board of India, is moving in the right direction in permitting commodity trading along with other securities on exchanges. With the integration of client accounts for trading in commodity with other exchange traded products already complete at the intermediary level, it will not be too difficult for the larger exchanges such as the NSE and the BSE to commence commodity trading as well. At its recent board meeting, SEBI announced that the required amendments to the Securities Contracts and Stock Exchanges and Clearing Corporation Regulations will be done to allow national exchanges facilitate trading in commodity futures and options too.

This move has multiple positive repercussions. Low volumes on commodity bourses is one of the main reasons behind the heightened speculative activity on these exchanges. The value of trades in commodity derivatives is just 3 per cent of the traded value of equity derivatives. If the traders in equity segment shift some trades to commodities, trading volumes will receive a boost. This can help check price manipulation, circular trading and other trading malpractices. A larger number of participants will also mean better price discovery. Two, stock exchanges have been operating under a stricter regulatory environment compared to commodity exchanges that have only recently moved under the purview of SEBI; the risk management practices in stock exchanges are also more robust. The credibility of the commodity derivative market will, therefore, improve with this amalgamation, and the interest of investors will also be better served.

While there is no disputing the prudence of this move, the regulator needs to ensure that it does more than just increase trading in commodity futures and options. Currently, agri futures account for around 11 per cent of the traded volume on exchanges with the rest of the turnover coming from trading in metals, bullion and energy. Many seasoned traders avoid trading in agri commodities due to low turnover, lack of a robust spot market, higher speculation and frequent regulatory intervention. Non-agri commodities, on the other hand, are linked to international prices and are easier to track and transact in. SEBI should ensure that the national exchanges facilitate trading in both agri and non-agri commodities. It is the trading in agri products that needs a boost in order to provide an avenue for farmers to sell their produce and hedge risk. While enabling trading in agri commodities will entail investing in establishing warehouses and setting up a network for spot polling to discover price, the national exchanges should be encouraged to invest in this infrastructure. With their superior execution capability and resources, they would be able to considerably improve the reach and awareness about commodity derivative products. The infrastructure for commodity trading including warehouses, repositories and assaying centres will expand as bigger players with deeper pockets enter the arena.

COMMENT NOW