Explainer: Pros & cons of the One Commodity One Exchange idea

Vishwanath Kulkarni |Suresh P. Iyengar | | Updated on: Dec 14, 2021

A single exchange launching contracts of a specific commodity derivative could result in higher volumes and have a bigger impact

What is One Commodity One Exchange proposal?

Currently there are multiple exchanges in India that have competing contracts on the same commodity, resulting in the fragmentation of trading volumes. Having a single exchange launching contracts of a specific commodity derivative could result in higher volumes and have a bigger impact. Globally, Bursa Malaysia Derivatives has developed a niche for crude palm oil, CME Group of the US is known for its contracts on soyabean, corn, wheat, gold, silver, crude oil and natural gas, while LME in the UK has gained a niche in non-ferrous metals such as aluminium, nickel, zinc and lead.

Who has proposed this and why?

Market regulator SEBI has floated the One Commodity One Exchange proposal through a consultation paper and has sought public comments. Though India is either one of the largest consumers or producers of a number of commodities, it has little or negligible say in setting commodity prices in such products. When stock exchanges have specific commodity contracts for trading exclusively on their platforms, they are likely to focus on developing various aspects such as adequate warehousing and storage, transport, communication technologies and setting standards for that particular commodity. Such measures by all stock exchanges for their respective commodities would lead to the development of the commodity derivatives market in the long run.

Will it apply to all commodities?

Of the 91 commodities notified by SEBI for trading in derivatives, trading happens in 40 commodities only. Even if each stock exchange focuses on two-three products of the 50 remaining commodities, they can develop 10-15 products in two-three years’ time. Such an effort by stock exchanges, if successful, may give the necessary forward push to the Indian commodity derivatives market in some of the commodities and may be successful in bringing the attention of the world to Indian markets. In case of agri-commodities, the concept should be applicable to narrow agri-commodities, which do not fall into the sensitive and broad category. Spices such as coriander or jeera, where production is concentrated in a specific region but has high volatility, are examples of narrow agri-commodities.

Will such a move reduce competition in the market?

SEBI believes that the proposed concept does not aim to thwart the competition amongst stock exchanges. However, it may provide a new impetus to stock exchanges to develop a market in their chosen commodities for the benefit of the stakeholders, rather than chasing the same set of stakeholders of a particular commodity. The concept is not against the concept of universal exchanges and is not being developed to bring any restrictions. Rather, it has been developed to curb the practice of stock exchanges that merely copy products launched by other stock exchanges and depend on shift of demand rather than building up new demand.

What does SEBI seek to achieve by doing this?

Through the proposed One Commodity One Exchange, SEBI is aiming at reducing fragmentation of liquidity and helping every stock exchange develop an exclusive set of un-fragmented liquid contracts. Through this, SEBI aims to bring about the comprehensive development and deepening of the Indian commodity derivatives markets and help India to be in a position so as to able to influence the global benchmark pricing of such commodities and become a price setter for such commodities.

What are the risks in promoting one commodity one exchange?

It may create artificial barriers at the cost of other markets and value chain participants, leading to increased overall costs, including trading, compliance and technology. Exchanges may block certain products for themselves but subsequently may not meaningfully develop them. An exchange, after making efforts for an initial period of 6 months to a year, may lose interest and decide not to invest further in that product and block other exchanges from launching that contract. Allowing only one exchange to offer products in a commodity for 3-5 years may go against market development as the designated exchange may fail to build liquidity, but at the same time would continue to enjoy a monopoly status in the said commodity.

Published on December 14, 2021
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