Relaunch derivatives trade in commodities whose prices are below MSP, says SEBI panel 

The Commodity and Derivatives Advisory Committee (CDAC) of the Securities and Exchange Board of India (SEBI) wants the Finance Ministry to relaunch derivatives trading in commodities that had been banned over the past two years.

“This was discussed at last week’s CDAC meeting and it was decided to approach the Ministry to relaunch these banned commodities as over one year has passed for, say, mustard and many other commodities and price have decreased,” said Narinder Wadhwa, National President, Commodity Participants Association of India (CPAI). Wadhwa is one of the members of CDAC. 

The CDAC was of the view that there was no link between derivative and spot prices and many studies by the Reserve Bank of India (RBI) and SEBI have revealed this. 

Factoring inflation

“Why are we doing this (ban trading in commodities)? Definitely, inflation is one factor. The Government is serious about this. But there is no direct link between derivative markets and the spot market,” he said. 

Prices had declined for many commodities and in some cases, they were below the minimum support price (MSP). CDAC has approached Finance Minister Nirmala Sitharaman. “The government should allow futures trading at least in commodities where their spot prices are below MSP,” Wadhwa said. 

In December 2021, SEBI banned derivatives trading in several commodities such as mustard and soyabean and their derivatives, chana, wheat, non-basmati paddy, crude palm oil and moong were among the commodities banned for a year.

Options trading 

 “We are suggesting that the Government launch futures trading in 2 or 3 of them in which the Centre is comfortable,” the CPAI national president said. 

On the other hand, there is hardly any trade in commodities such as wheat and in the long term, the Centre has to replace the MSP with options trading. This will ensure a vibrant derivatives market and help replace the MSP, he said. 

“We want the market contracts for wider commodities such as wheat to be revived basically,” Wadhwa said. 

The CDAC has formed an expert committee to look into compulsory delivery contracts. SEBI came up with this norm two years ago and this resulted in a drop in the volume of trade. 

Studying fiat’s impact 

“We discussed if the compulsory delivery is necessary or if we need a relook at it. So the expert committee has been formed and it will look at various data points to study if the fall in volume is due to the delivery norm or any other reason,” he said. 

World-over hardly 0.5 per cent of the derivatives trade results in delivery but SEBI felt it was leading to speculation and prices in the derivatives market had to converge with the spot rates, he said, adding that CDAC felt the expert panel should look into this. 

The CDAC has decided that commodity exchanges need not approach the Finance Ministry, which supervises SEBI and commodity exchanges operations, every time they want to introduce a new contract in a commodity for which derivatives trading has been permitted. 

“For example, if an exchange wants to introduce a new contract in aluminium, it has to approach SEBI and in turn, this goes to the Ministry. So, now CDAC has decided that the exchanges need not go to the Government again and SEBI is empowered to allow it,” Wadhwa said. 

Market limits

CDAC had decided to review the market limit calculation since the current norms were not allowing trading to expand. Currently, SEBI has set a floor and cap margin for the price fall and rise, respectively, in the derivatives market. 

Though SEBI has allowed increased participation of new players in the commodities market, they are constrained by these limits. “If you have allowed financial institution investors to participate in the commodities market, they cannot work within the existing limit or open interest. CDAC has decided to re-look into open interest and market limits,” the CPAI national president said.   

The limit for each commodity differs, depending on whether it is traded in the international or domestic market. “CDAC has decided to review the margins for all commodities,” he said. 

On attracting more investors into derivatives trading, Wadhwa said though SEBI has allowed FIIs and mutual funds to participate, there were some bottlenecks in their wholehearted participation. 

Other efforts

“You have to give them some relaxation. We have suggested from the CPAI side to sort out some small issues for participants such as portfolio management services,” Wadhwa said. 

Efforts are on to meet the Committee of Secretaries and Committee of Ministers to explain the problems in various issues, such as banning derivatives trade in a particular commodity. “We have started approaching them as they are the ones taking such decisions. We are telling them that their decisions should not be market-driven and such interventions should be avoided,” the CPAI president said. 

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