Inflexion point

Commodity derivative markets, that have been witnessing fast-paced changes after regulatory control was handed over to the Securities and Exchange Board of India, are about to begin a new high-growth phase with the entry of the BSE and the NSE in this segment. While the regulator is right in hoping that greater number of exchanges will deepen the market and increase product offerings, thus creating an effective platform where stakeholders can hedge their price risk, it cannot afford to lower its guard yet. Besides supporting the exchanges through right policy measures, it should also maintain a tight vigil to ensure that there is no unhealthy competition among exchanges.

SEBI has gone about its task of regulating the commodity derivative segment in an efficient manner, beginning with redrafting the rules for trading, membership, products and risk management. Market surveillance has also improved with tighter supervision and scrutiny. With the basic ground-work done, the regulator is now trying to increase participation by allowing the country’s largest stock exchanges, the BSE and the NSE, into this segment. While these exchanges, with their greater reach and deeper pockets could help expand the market, SEBI needs to keep a tight vigil on the new entrants to ensure that they launch contracts that serve farmers and companies in hedging price risks; contracts that are of interest to financial participants alone, need to be discouraged. It has often been seen that exchanges tend to use predatory pricing or other underhand methods to garner market share; they should be dissuaded from doing so. Along with this, the two exchanges need to be coaxed into launching agri contracts soon. Both exchanges are beginning their foray in this segment with bullion and energy-based contracts.While agri-contracts are more complex, there is a relatively greater need for these.

It is heartening to note that both the RBI and SEBI appear intent upon supporting the commodity exchanges. A couple of regulatory changes in recent times prove this point. One, from July 1, domestic companies with direct exposure to commodity price risk in gold, gems and precious stones have been barred by RBI from hedging in international markets. This is likely to result in these companies using the domestic exchanges to take cover; thus helping domestic commodity derivative volumes. The other regulatory move that has a bearing on commodity derivative volume is the recent rule requiring all listed companies to disclose their commodity risk, hedged exposure as well as their risk-management policy. Once such disclosure is made mandatory, the fear of investor displeasure will make companies take greater cover for their commodity exposures. This could also help improve volumes on exchanges. Besides these, the regulator also needs to examine ways to bring down the high cost of trading in domestic exchanges and look at ways to increasing participation in markets by allowing other investor segments such as mutual funds entry into this market.

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