Routing commodity trades through brokers may push up costs for hedgers

Suresh P Iyengar Mumbai | Updated on January 23, 2018


SEBI plan could pose big challenge for physical market participants, such as large corporates

Capital markets regulator SEBI has directed commodity broking firms to register themselves with it and abide by all norms for market intermediaries, including ‘fit and proper’ criteria once the Forward Markets Commission-SEBI merger becomes effective from September 28.

Once the registration is completed, SEBI may route all the commodity trades through the brokers as it is currently being done in the stock market.

Liquidity to dip

This may pose a major challenge for physical market participants, such as large corporates and bullion traders who are registered currently as clearing members with the exchanges.

“Physical market participants come to the exchange to hedge their risk, unlike in equity market where investors look for opportunity to make profit. The cost of hedging would go up manifold if trades are routed through brokers and drive away liquidity to overseas markets,” said a commodity exchange official on condition of anonymity.

Physical market participants account for about 20-30 per cent of commodity exchanges turnover. At present, commodity brokers are registered as members with exchanges but FMC does not have powers to regulate them. It is still not clear how SEBI will consider the allegation of fraud against brokers in the National Spot Exchange case while determining their ‘fit and proper’ criteria.

Three senior officials of leading broking firms were arrested after investors complained that brokers wooed them with false promises and routed benami investments by using their credentials. The exchange suspended trade abruptly two years back and failed to settle trades worth ₹5,600 crore. The exchange and brokers are now fighting a series of lawsuits.

Commodity SEs’ woes

Though the three national commodity exchanges will get deemed stock exchange status they will not be allowed to provide equity trading platform for at least one year. Similarly, stock exchanges have to wait for a play in commodity space. This means BSE, which already has SEBI approval for launching a commodity exchange, will have to wait.

Commodity exchanges, which clear trades through their respective internal departments, were told to set up their own clearing houses with minimum networth of ₹100 crore, rising progressively to ₹300 crore within a timeframe to be specified by SEBI.

Published on August 20, 2015

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